UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2018~~March 31, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number0-18277

VICOR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

04-2742817

(State of Incorporation)

(I.R.S. Employer

Identification No.)

25 Frontage Road, Andover, Massachusetts 01810

(Address of Principal Executive Office)

(978)470-2900

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files.) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.


Large accelerated filer	☐	~~Accelerated filer~~	☒

~~Non-accelerated filer~~	~~☐ (Do not check if a smaller reporting company)~~	Smaller reporting company	☐

Accelerated filer	☐	Emerging growth company	☐

Non-accelerated filer	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of each of the issuer’s classes of Common Stock as of~~July~~ ~~24, 2018~~April 19, 2019was:


Common Stock, $.01 par value			~~28,161,527~~28,506,334
Class B Common Stock, $.01 par value			11,758,218

VICOR CORPORATION

Part I – Financial Information

Item 1 – Financial Statements

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	53,920		$	44,230		$	66,614		$	70,557
Accounts receivable, less allowance of $226 in 2018 and $159 in 2017		45,056			34,487
Accounts receivable, less allowance of $131 in 2019 and $224 in 2018								41,705			43,673
Inventories, net		41,753			36,499			51,589			47,370
Other current assets		4,102			3,616			3,880			3,460

Total current assets		144,831			118,832			163,788			165,060
Long-term deferred tax assets, net		185			210			266			265
Long-term investments, net		2,581			2,525			2,546			2,526
Property, plant and equipment, net		40,433			41,356			55,642			50,432
Other assets		2,813			2,801			2,762			2,785

Total assets	$	190,843		$	165,724		$	225,004		$	221,068

Liabilities and Equity
Current liabilities:
Accounts payable	$	11,219		$	9,065		$	11,177		$	16,149
Accrued compensation and benefits		11,049			9,891			9,410			10,657
Accrued expenses		2,535			2,989			2,166			2,631
Operating lease liabilities								1,678			—
Sales allowances		550			—			617			548
Accrued severance charge		350			—
Accrued severance and other charges								49			234
Income taxes payable		526			300			182			710
Deferred revenue		4,610			5,791			5,454			5,069

Total current liabilities		30,839			28,036			30,733			35,998

Long-term deferred revenue		267			303			214			232
Contingent consideration obligations		506			678			378			408
Long-term income taxes payable		195			195			240			238
Other long-term liabilities		98			93
Long-term operating lease liabilities								2,747			102

Total liabilities		31,905			29,305			34,312			36,978

Commitments and contingencies (Note 12)

Equity:
Vicor Corporation stockholders’ equity:
Class B Common Stock		118			118			118			118
Common Stock		399			401			403			402
Additionalpaid-in capital		188,276			181,395			195,799			193,457
Retained earnings		109,078			93,605			133,286			129,000
Accumulated other comprehensive loss		(401	)		(478	)		(436	)		(394	)
Treasury stock, at cost		(138,927	)		(138,927	)		(138,927	)		(138,927	)

Total Vicor Corporation stockholders’ equity		158,543			136,114			190,243			183,656
Noncontrolling interest		395			305			449			434

Total equity		158,938			136,419			190,692			184,090

Total liabilities and equity	$	190,843		$	165,724		$	225,004		$	221,068

See accompanying notes.

-1-

VICOR CORPORATION

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Net revenues	$	74,196		$	57,709		$	139,465		$	112,171		$	65,725		$	65,269
Cost of revenues		38,313			31,779			73,371			62,589			34,639			35,058

Gross margin		35,883			25,930			66,094			49,582			31,086			30,211
Operating expenses:
Selling, general and administrative		15,814			14,536			31,213			28,559			15,373			15,399
Research and development		11,403			11,932			22,529			22,939			11,220			11,126
Severance charge		350			—			350			—

Total operating expenses		27,567			26,468			54,092			51,498			26,593			26,525

Income (loss) from operations		8,316			(538	)		12,002			(1,916	)
Income from operations														4,493			3,686
Other income (expense), net:
Total unrealized gains onavailable-for-sale securities, net		33			39			56			57			20			23
Less: portion of gains recognized in other comprehensive income (loss)		(31	)		(36	)		(52	)		(51	)
Less: portion of gains recognized in other comprehensive income														(19	)		(21	)

Net credit gains recognized in earnings		2			3			4			6			1			2
Other income (expense), net		(46	)		357			382			679			238			428

Total other income (expense), net		(44	)		360			386			685			239			430

Income (loss) before income taxes		8,272			(178	)		12,388			(1,231	)
Income before income taxes														4,732			4,116
Less: Provision for income taxes		363			267			497			168			426			134

Consolidated net income (loss)		7,909			(445	)		11,891			(1,399	)
Consolidated net income														4,306			3,982
Less: Net income attributable to noncontrolling interest		49			14			88			34			20			39

Net income (loss) attributable to Vicor Corporation	$	7,860		$	(459	)	$	11,803		$	(1,433	)
Net income attributable to Vicor Corporation													$	4,286		$	3,943

Net income (loss) per common share attributable to Vicor Corporation:
Net income per common share attributable to Vicor Corporation:
Basic	$	0.20		$	(0.01	)	$	0.30		$	(0.04	)	$	0.11		$	0.10
Diluted	$	0.19		$	(0.01	)	$	0.29		$	(0.04	)	$	0.10		$	0.10
Shares used to compute net income (loss) per common share attributable to Vicor Corporation:
Shares used to compute net income per common share attributable to Vicor Corporation:
Basic		39,709			39,172			39,594			39,121			40,229			39,479
Diluted		40,646			39,172			40,406			39,121			41,029			40,167

See accompanying notes.

-2-

VICOR CORPORATION

Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~

(In thousands)

(Unaudited)

   Three Months Ended
June 30, Six Months Ended
June 30,
   2018 2017 2018    2017
Consolidated net income (loss)
   $ 7,909 $ (445 ) $ 11,891    $ (1,399 )
Foreign currency translation (losses) gains, net of tax (1)
   (215 ) (40 ) 27    104
Unrealized gains onavailable-for-sale securities, net of tax (1)
   31 36 52    51




Other comprehensive income (loss)
   (184 ) (4 ) 79    155




Consolidated comprehensive income (loss)
   7,725 (449 ) 11,970    (1,244 )
Less: Comprehensive income attributable to noncontrolling interest
   32 11 90    42




Comprehensive income (loss) attributable to Vicor Corporation
   $ 7,693 $ (460 ) $ 11,880    $ (1,286 )


	Three Months Ended March 31,
	2019			2018
Consolidated net income	$	4,306		$	3,982
Foreign currency translation (losses) gains, net of tax (1)		(66	)		242
Unrealized gains onavailable-for-sale securities, net of tax (1)		19			21

Other comprehensive (loss) income		(47	)		263

Consolidated comprehensive income		4,259			4,245
Less: Comprehensive income attributable to noncontrolling interest		15			58

Comprehensive income attributable to Vicor Corporation	$	4,244		$	4,187

(1)

The deferred tax assets associated with cumulative foreign currency translation gains and cumulative unrealized gains onavailable-for-sale securities are completely offset by a tax valuation allowance as of ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. Therefore, there is no income tax benefit (provision) recognized for the three and ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

See accompanying notes.

-3-

VICOR CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Operating activities:
Consolidated net income (loss)	$	11,891		$	(1,399	)
Adjustments to reconcile consolidated net income (loss) to net cash provided by (used for) operating activities:
Consolidated net income							$	4,306		$	3,982
Adjustments to reconcile consolidated net income to net cash used for operating activities:
Depreciation and amortization		4,539			4,346			2,445			2,269
Stock-based compensation expense, net		1,916			541			773			736
Provision for doubtful accounts		65			8
Decrease in long-term income taxes payable		—			(7	)
(Benefit) provision for doubtful accounts								(88	)		32
Increase in long-term income taxes payable								2			5
Increase in other long-term liabilities		5			87			—			2
Decrease in long-term deferred revenue		(36	)		(35	)		(18	)		(18	)
Gain on disposal of equipment		(16	)		(23	)		(9	)		(14	)
Deferred income taxes		25			17			(1	)		(3	)
Credit gain onavailable-for-sale securities		(4	)		(6	)		(1	)		(2	)
Change in current assets and liabilities, net		(9,857	)		(4,232	)		(9,529	)		(7,801	)

Net cash provided by (used for) operating activities		8,528			(703	)

Net cash used for operating activities								(2,120	)		(812	)
Investing activities:
Additions to property, plant and equipment		(3,558	)		(5,631	)		(3,322	)		(1,858	)
Proceeds from sale of equipment		16			23			9			14
Increase in other assets		(67	)		(80	)		(8	)		(104	)

Net cash used for investing activities		(3,609	)		(5,688	)		(3,321	)		(1,948	)

Financing activities:
Proceeds from issuance of Common Stock		4,966			1,769			1,570			1,285
Payment of contingent consideration obligations		(172	)		(111	)		(30	)		(94	)

Net cash provided by financing activities		4,794			1,658			1,540			1,191

Effect of foreign exchange rates on cash		(23	)		(12	)		(42	)		17

Net increase (decrease) in cash and cash equivalents		9,690			(4,745	)
Net decrease in cash and cash equivalents								(3,943	)		(1,552	)
Cash and cash equivalents at beginning of period		44,230			56,170			70,557			44,230

Cash and cash equivalents at end of period	$	53,920		$	51,425		$	66,614		$	42,678

See accompanying notes.

-4-

VICOR CORPORATION

Condensed Consolidated Statements of Equity

(In thousands)

(Unaudited)


Three Months Ended March 31, 2019	Class B Common Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Vicor Corporation Stockholders’ Equity			Noncontrolling Interest			Total Equity
Balance on December 31, 2018	$	118	$	402	$	193,457	$	129,000	$	(394	)	$	(138,927	)	$	183,656		$	434		$	184,090
Sales of Common Stock						291										291						291
Stock-based compensation expense						773										773						773
Issuances of stock through employee stock purchase plan				1		1,278										1,279						1,279
Components of comprehensive income, net of tax
Net income								4,286								4,286			20			4,306
Other comprehensive loss										(42	)					(42	)		(5	)		(47	)

Total comprehensive income																4,244			15			4,259

Balance on March 31, 2019	$	118	$	403	$	195,799	$	133,286	$	(436	)	$	(138,927	)	$	190,243		$	449		$	190,692


Three Months Ended March 31, 2018	Class B Common Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Vicor Corporation Stockholders’ Equity			Noncontrolling Interest			Total Equity
Balance on December 31, 2017	$	118	$	401	$	181,395	$	93,605	$	(478	)	$	(138,927	)	$	136,114		$	305		$	136,419
Sales of Common Stock						358										358						358
Stock-based compensation expense						736										736						736
Issuances of stock through employee stock purchase plan				1		926										927						927
Cumulative effect of adoption of new accounting principle (Topic 606)								3,670								3,670						3,670
Components of comprehensive income, net of tax
Net income								3,943								3,943			39			3,982
Other comprehensive income										244						244			19			263

Total comprehensive income																4,187			58			4,245

Balance on March 31, 2018	$	118	$	402	$	183,415	$	101,218	$	(234	)	$	(138,927	)	$	145,992		$	363		$	146,355

-5-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

~~June 30, 2018~~March 31, 2019

(unaudited)

1.	Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Vicor Corporation and its consolidated subsidiaries (collectively, the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, ~~2018.~~2019. The balance sheet at December 31, ~~2017~~2018 presented herein has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form10-K for the year ended December 31, ~~2017~~2018 filed by the Company with the Securities and Exchange Commission on ~~March 9,~~ February 28, 2019 (“2018 ~~(“2017~~ Form10-K”).

2.	Recently Adopted Accounting Standard

In ~~May 2014,~~February 2016, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued new guidance for ~~revenue recognition (“Topic 606”),~~lease accounting, which requires ~~an entity~~lessees to recognize leases on the ~~amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.~~balance sheet and disclose key information about leasing arrangements. The new guidance ~~which includes several amendments, replaces most~~establishes aright-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with a term longer than twelve months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the ~~prior revenue recognition~~income statement. For lessors, the guidance ~~under U.S. Generally Accepted Accounting Principles.~~ modifies the classification criteria and accounting for sales-type and direct financing leases.

The Company adopted the new ~~guidance~~standard as of January 1, ~~2018~~2019, using the ~~modified retrospective method,~~effective date as ~~applied to all contracts.~~the date of initial application. As a result, financial information has not been updated and the Company has changed its accounting policy for revenue recognition, as detailed below. The most significant impact of the adoption was on the timing of recognition of sales to the Company’s stocking distributors and including the additionaldisclosures required ~~disclosures~~ under the new ~~standard. Through December 31, 2017,~~standard have not been provided for dates and periods before January 1, 2019. The Company elected the ‘package of practical expedients’, which permits companies to not reassess under the new standard lease identification, lease classification and initial direct costs. The Company ~~deferred revenue and~~did not elect the ~~related cost of sales on shipments~~use-of-hindsight or the practical expedient pertaining to ~~stocking distributors until~~land easements, the ~~distributors resold the products to their customers. Upon~~latter not being applicable.

The adoption the Company is no longer permitted to defer revenue until sale by the stocking distributor to the end customer, but rather, is required to estimate the effects of returns and allowances provided to stocking distributors and record revenue at the time of sale to the stocking distributor. In addition, the Company modified the accounting for a contractual arrangement due to a reassessment of the ~~number of performance obligations~~standard resulted in the ~~arrangement,~~recognition of ROU assets and ~~adjusted for the timing~~lease liabilities of ~~certain royalty revenue. The~~approximately $4,329,000 and $4,455,000, respectively, as of January 1, 2019. There was no cumulative effect of adopting this new guidance, ~~recorded as an increase to~~and the ~~balance of retained earnings as of January 1, 2018, was approximately $3,670,000. The comparative information for the three and six months ended December 31, 2017, including disclosures, has~~standard did not ~~been restated and continues to be reported under the accounting standards in effect for that period.~~

~~-5-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

~~The following tables summarize the impacts of adopting the new revenue recognition guidance~~have a material impact on ~~certain components of~~ the Company’s ~~condensed consolidated financial statements as of and for the three and six months ended June 30, 2018 (in thousands):~~

~~Consolidated Balance Sheet Items~~

   As reported    Adjustments    Balances without
adoption of
Topic 606
Accounts receivable, net
   $ 45,056    $ (39 )    $ 45,017
Inventories, net
   41,753    (97 )    41,656
Total assets
   190,843    (136 )    190,707
Income taxes payable
   526    (18 )    508
Deferred revenue
   4,610    4,445    9,055
Sales allowances
   550    (466 )    84
Total liabilities
   31,905    3,961    35,866
Retained earnings
   109,078    (4,097 )    104,981
Total equity
   158,938    (4,097 )    154,841
Total liabilities and equity
   190,843    (136 )    190,707

~~-6-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

~~Consolidated Statement of Operations Items~~

   Three Months Ended
   As reported    Adjustments    Balances without
adoption of
Topic 606
Net revenues
   $ 74,196    $ (597 )    $ 73,599
Cost of revenues
   38,313    (372 )    37,941






Gross margin
   35,883    (225 )    35,658
Income before income taxes
   8,272    (225 )    8,047
Provision for income taxes
   363    (11 )    352
Consolidated net income
   7,909    (214 )    7,695
Net income attributable to Vicor Corporation
   7,860    (214 )    7,646
   Six Months Ended
   As reported    Adjustments    Balances without
adoption of
Topic 606
Net revenues
   $ 139,465    $ (1,401 )    $ 138,064
Cost of revenues
   73,371    (956 )    72,415






Gross margin
   66,094    (445 )    65,649
Income before income taxes
   12,388    (445 )    11,943
Provision for income taxes
   497    (18 )    479
Consolidated net income
   11,891    (427 )    11,464
Net income attributable to Vicor Corporation
   11,803    (427 )    11,376

~~The impact of the adoption of the new revenue recognition standard on the unaudited~~ consolidated statements of ~~comprehensive income (loss) and~~operations or cash flows for the three ~~and six~~ months ended ~~June 30, 2018 was not material.~~

3.~~Revenue Recognition~~

~~Prior to January~~ ~~1, 2018~~

Product revenue was recognized in the period when persuasive evidence of an arrangement with a customer existed, the products were shipped and title was transferred to the customer, the price was fixed or determinable, and collection was considered probable.

The Company deferred revenue and the related cost of sales on shipments to stocking distributors until the distributors resold the products to their customers. The agreements with these stocking distributors allowed them to receive price adjustment credits or to return qualifying products for credit, as determined by the Company, in order to reduce the amounts of slow-moving, discontinued, or obsolete product from their inventory. These stocking distributors were also granted price adjustment credits in the event of a price decrease subsequent to the date the product was shipped and invoiced to the stocking distributor. Given the uncertainties associated with the levels of price adjustment credits to be granted to stocking distributors, the sales price to the stocking distributor was not fixed or determinable until the stocking distributor resold the products to its customers. Therefore,

~~-7-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

the Company deferred revenue and the related cost of sales on shipments to stocking distributors until the stocking distributors resold the products to their customers. Accordingly, the Company’s revenue fully reflected~~end-customer~~ purchases and was not impacted by stocking distributor inventory levels. Agreements with stocking distributors limited returns of qualifying product to the Company to a certain percentage of the value of the Company’s shipments to that stocking distributor during the prior quarter. In addition, stocking distributors were allowed to return unsold products if the Company terminated the relationship with the stocking distributor. Title to the inventory transferred to the stocking distributor at the time of shipment or delivery to the stocking distributor. Payment from the stocking distributors were due in accordance with the Company’s standard payment terms. These payment terms were not contingent upon the stocking distributors’ sale of the products to their~~end-customers.~~ Upon title transfer to stocking distributors, the Company reduced inventory for the cost of goods shipped, the margin (i.e., revenues less cost of revenues) was recorded as deferred revenue, and an account receivable was recorded. As of DecemberMarch 31, ~~2017, the Company had gross deferred revenue of approximately $4,659,000 and gross deferred cost of revenues of approximately $2,135,000 under agreements with stocking distributors.~~2019.

The Company evaluated revenue arrangements with potential multi-element deliverables to determine if there were more than one unit of accounting. A deliverable constituted a separate unit of accounting when it had standalone value and there were no customer-negotiated refund or return rights for the undelivered elements. The Company entered into arrangements containing multiple elements that could include a combination of~~non-recurring~~ engineering services (“NRE”), prototype units, and production units. The Company determined NRE and prototype units represented one unit of accounting and production units represented a separate unit of accounting, based on an assessment of the respective standalone value. The Company deferred revenue recognition for NRE and prototype units until completion of the final milestone under the NRE arrangement, which was generally the delivery of the prototype. Recognition generally took place within six to twelve months of the initiation of the arrangement. Revenue for the production units was recognized upon shipment, consistent with other product revenue summarized above.

License fees were recognized as earned. The Company recognized revenue on such arrangements only when the contract was signed, the license term had begun, all obligations had been delivered to the customer, and collection was probable.

~~Subsequent to January~~ ~~1, 2018~~

Revenue is recognized when control of the promised goods or services is transferred to a customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales, value add, and other taxes collected concurrent with revenue-producing activities are excluded from revenue. The expected costs associated with product warranties continue to be recognized at the time product revenue is recognized. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.

The Company’s primary source of net revenue comes from the sale of products, which are modular power components and power systems for converting, regulating and controlling electric current. The principal customers for the Company’s power converters and systems are large original equipment manufacturers and the original design manufacturers and contract manufacturers serving them, and smaller, lower volume users, which are broadly distributed across several major market areas. The Company recognizes revenue for product sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery, depending on the terms of the underlying contract. As noted above, the Company previously deferred revenue and the related cost of revenues on shipments to stocking distributors until the distributors resold the products to their customers. The Company now records revenue for such transactions at the time of sale to the stocking distributor. The Company establishes sales allowances for estimated future product returns including distributor returns and price adjustment credits, primarily based upon historical and anticipated rates of product returns and allowances.

Certain contracts with customers contain multiple performance obligations, which typically may include a combination of NRE, prototype units, and production units. For these contracts, the individual performance obligations are accounted for separately if they are distinct. Generally, the Company has determined the NRE and prototype units represent one distinct performance obligation and the production units represent a separate distinct performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price, based on prices charged to customers or using the expected cost plus a margin approach. The Company defers revenue recognition for NRE and prototype

~~-8-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

units until the point in time at which the final milestone under the NRE arrangement is completed and control is transferred to the customer, which is generally the delivery of the prototype. Revenue for production units is recognized upon shipment or delivery, consistent with product revenue summarized above.

The Company licenses its intellectual property under right to use licenses, in which royalties due to the Company are based upon a percentage of the licensee’s sales. The Company utilizes the exception under the revenue recognition guidance for the recognition of sales- or usage-based royalties, in which the royalties are not recognized until the later of when 1) the customer’s subsequent sales or usages occur, or 2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied or partially satisfied.

Accounts receivable includes amounts billed and currently due from customers. The amounts due are stated at their estimated realizable value. The Company’s payment terms vary by the type and location of its customers and the products or services offered, although terms generally include a requirement of payment within 30 to 60 days. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, based on assessments of customers’ credit-risk profiles and payment histories. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company does not require collateral from its customers, although there have been circumstances when the Company has required cash in advance (i.e., a partial down-payment) to facilitate orders in excess of a customer’s established credit limit. To date, such amounts have not been material.

The Company records deferred revenue, which represents a contract liability, when cash payments are received or due in advance of performance under a contract with a customer. During the three and six months ended June 30, 2018, under Topic 606, the Company recognized revenue of approximately $340,000 and $385,000, respectively, that was included in deferred revenue at the beginning of each respective period.

The Company applies the practical expedient allowed under the new guidance for the incremental costs of obtaining a contract for sales commissions, which are expensed when incurred because the amortization period is generally less than one year. These costs are included in selling, general and administrative expenses.

The Company also applies another practical expedient allowed under the new guidance and does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

~~-9-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

The following tables present the Company’s net revenues disaggregated by geography based on the location of the customer, by reportable segment, for the three and six months ended June 30, 2018 (in thousands):

   Three Months Ended
   BBU    VI Chip    Picor    Total
United States
   $ 18,295    $ 7,771    $ 353    $ 26,419
Europe
   4,877    1,169    106    6,152
Asia Pacific
   23,876    10,905    5,482    40,263
All other
   1,301    45    16    1,362








   $ 48,349    $ 19,890    $ 5,957    $ 74,196








   Six Months Ended
   BBU    VI Chip    Picor    Total
United States
   $ 35,286    $ 15,770    $ 986    $ 52,042
Europe
   9,602    1,742    181    11,525
Asia Pacific
   42,087    22,292    9,240    73,619
All other
   2,011    225    43    2,279








   $ 88,986    $ 40,029    $ 10,450    $ 139,465

~~-10-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

~~The following tables present the Company’s net revenues disaggregated by the category of revenue, by reportable segment, for the three and six months ended June 30, 2018 (in thousands):~~

   Three Months Ended
   BBU    VI Chip    Picor    Total
Direct customers, contract manufacturers andnon-stocking distributors
   $ 43,404    $ 17,628    $ 5,502    $ 66,534
Stocking distributors, net of sales allowances
   4,735    1,865    343    6,943
Non-recurring engineering
   197    375    90    662
Royalties
   13    13    13    39
Other
   —      9    9    18








   $ 48,349    $ 19,890    $ 5,957    $ 74,196








   Six Months Ended
   BBU    VI Chip    Picor    Total
Direct customers, contract manufacturers andnon-stocking distributors
   $ 78,878    $ 34,934    $ 9,482    $ 123,294
Stocking distributors, net of sales allowances
   9,698    4,419    732    14,849
Non-recurring engineering
   372    620    180    1,172
Royalties
   38    38    38    114
Other
   —      18    18    36








   $ 88,986    $ 40,029    $ 10,450    $ 139,465

~~The following table presents the changes in certain contract assets and (liabilities) (in thousands):~~

   June 30, 2018    December 31, 2017    Increase
(decrease)
Accounts receivable
   $ 45,056    $ 34,487    $ 10,569
Deferred revenue
   (2,652 )    (5,015 )    2,363
Deferred expenses
   776    377    399
Customer prepayments
   (1,958 )    (776 )    (1,182 )
Sales allowances
   (550 )    —      (550 )

~~-11-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

The increase in accounts receivable was primarily due to an increase in net revenues of approximately $15,425,000 in the second quarter of 2018 compared to the fourth quarter of 2017. The decrease in deferred revenue was primarily due to the adoption of the new revenue recognition guidance, as the balances related to stocking distributors were reversed as part of the transition adjustment recorded as of January 1, 2018 (see Note 2 to the Condensed Consolidated Financial Statements). The increase in deferred expenses is primarily due to additional work incurred on certain NRE projects during the second quarter of 2018 for which the associated revenue is being deferred. The increase in sales allowances was due to the establishment of new allowances, in connection with the new revenue recognition guidance, for potential returns and price adjustment credits on sales to stocking distributors.

~~Deferred expenses are included in Other current assets, and customer prepayments are included in Deferred revenue, in the accompanying Condensed Consolidated Balance Sheets, respectively.~~

4.~~Long-Term Investments~~

As of June 30, 2018 and December 31, 2017, the Company held one auction rate security with a par value of $3,000,000, purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the “Failed Auction Security”) since February 2008. The Failed Auction Security held by the Company is Aaa/AA+ rated by major credit rating agencies, is collateralized by student loans, and is guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program. Management is not aware of any reason to believe the issuer of the Failed Auction Security is presently at risk of default. Through June 30, 2018, the Company has continued to receive interest payments on the Failed Auction Security in accordance with the terms of its indenture. Management believes the Company ultimately should be able to liquidate the Failed Auction Security without significant loss primarily due to the overall quality of the issue held and the collateral securing the substantial majority of the underlying obligation. However, current conditions in the auction rate securities market have led management to conclude the recovery period for the Failed Auction Security exceeds 12 months. As a result, the Company continued to classify the Failed Auction Security as long-term as of June 30, 2018.

~~The following is a summary ofavailable-for-sale~~ ~~securities (in thousands):~~

June 30, 2018
   Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Estimated
Fair
Value
Failed Auction Security
   $ 3,000    $ —      $ 419    $ 2,581








December 31, 2017
   Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Estimated
Fair
Value
Failed Auction Security
   $ 3,000    $ —      $ 475    $ 2,525

~~As of June 30, 2018, the Failed Auction Security had been in an unrealized loss position for greater than 12 months.~~

~~-12-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

~~The amortized cost and estimated fair value of the Failed Auction Security on June 30, 2018, by contractual maturity, is shown below (in thousands):~~

      Estimated
   Cost    Fair Value
Due in twenty to forty years
   $ 3,000    $ 2,581

Based on the fair value measurements described in Note 5, the fair value of the Failed Auction Security on June 30, 2018, with a par value of $3,000,000, was estimated by the Company to be approximately $2,581,000. The gross unrealized loss of $419,000 on the Failed Auction Security consists of two types of estimated loss: an aggregate credit loss of $44,000 and an aggregate temporary impairment of $375,000. In determining the amount of credit loss, the Company compared the present value of cash flows expected to be collected to the amortized cost basis of the security, considering credit default risk probabilities and changes in credit ratings as significant inputs, among other factors (See Note 5).

~~The following table represents a rollforward of the activity related to the credit loss recognized in earnings on the Failed Auction Security for the six months ended June 30 (in thousands):~~

   2018    2017
Balance at the beginning of the period
   $ 48    $ 59
Reductions in the amount related to credit gain for which other-than- temporary impairment was not previously recognized
   (4 )    (6 )




Balance at the end of the period
   $ 44    $ 53

At this time, the Company has no intent to sell the impaired Failed Auction Security and does not believe it is more likely than not the Company will be required to sell this security. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses. If the credit rating of the security deteriorates, the Company may be required to adjust the carrying value of the investment through impairment charges recorded in the Condensed Consolidated Statements of Operations, and any such impairment adjustments may be material.

Based on the Company’s ability to access cash and cash equivalents and its expected operating cash flows, management does not anticipate the current lack of liquidity associated with the Failed Auction Security held will affect the Company’s ability to execute its current operating plan.

5.~~Fair Value Measurements~~

The Company accounts for certain financial assets at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions market participants would use in pricing an asset or liability. A three-level hierarchy is used to show the extent and level of judgment used to estimate fair value measurements.

~~-13-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

~~Assets and liabilities measured at fair value on a recurring basis included the following as of June 30, 2018 (in thousands):~~

   Using
   Quoted Prices
in Active
Markets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)    Total Fair
Value as of
June 30, 2018
Cash equivalents:

Money market funds
   $ 9,501    $ —      $ —      $ 9,501
Long-term investments:

Failed Auction Security
   —      —      2,581    2,581
Liabilities:

Contingent consideration obligations
   —      —      (506 )    (506 )
Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 2017 (in thousands):

   Using
   Quoted Prices
in Active
Markets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)    Total Fair
Value as of
December 31, 2017
Cash equivalents:

Money market funds
   $ 9,279    $ —      $ —      $ 9,279
Long-term investments:

Failed Auction Security
   —      —      2,525    2,525
Liabilities:

Contingent consideration obligations
   —      —      (678 )    (678 )

As of June 30, 2018, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Security using Level 1 or Level 2 inputs. As such, the Company’s investment in the Failed Auction Security was deemed to require valuation using Level 3 inputs. Management, after consulting with advisors, valued the Failed Auction Security using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set). Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of this security as of June 30, 2018. The major assumptions used in preparing the DCF model were similar to those described in Note 5 - Fair Value Measurements in the Notes to the Consolidated Financial Statements contained in the Company’s 2017 Form~~10-K.~~

~~-14-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

~~Quantitative information about Level 3 fair value measurements as of June 30, 2018 is as follows (dollars in thousands):~~

   Fair Value    Valuation
Technique
Unobservable
Input
   Weighted
Average
Failed Auction Security
   $ 2,581    Discounted
cash flow    Cumulative probability of earning the maximum rate until maturity    0.06 %
         Cumulative probability of principal return prior to maturity    94.36 %
         Cumulative probability of default    5.58 %
         Liquidity risk premium    5.00 %
         Recovery rate in default    40.00 %

The change in the estimated fair value calculated for the investment valued on a recurring basis utilizing Level 3 inputs (i.e., the Failed Auction Security) for the six months ended June 30, 2018 was as follows (in thousands):

Balance at the beginning of the period
   $ 2,525
Credit gain onavailable-for-sale securities included in Other income (expense), net
   4
Gain included in Other comprehensive income
   52


Balance at the end of the period
   $ 2,581

The Company has classified its contingent consideration obligations as Level 3 because the fair value for these liabilities was determined using unobservable inputs. The liabilities were based on estimated sales of legacy products over the period of royalty payments at the royalty rate, discounted using the Company’s estimated cost of capital.

The change in the estimated fair value calculated for the liabilities valued on a recurring basis utilizing Level 3 inputs (i.e., the Contingent consideration obligations) for the six months ended June 30, 2018 was as follows (in thousands):

Balance at the beginning of the period
   $ 678
Payments
   (172 )


Balance at the end of the period
   $ 506

~~There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2018.~~

~~-15-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

6.~~Stock-Based Compensation~~

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock option awards and options granted under the Vicor Corporation 2017 Employee Stock Purchase Plan (“ESPP”) as of their grant date. Stock-based compensation expense, net for the three and six months ended June 30 was as follows (in thousands):

   Three Months Ended
June 30,    Six Months Ended
June 30,
   2018    2017    2018    2017
Cost of revenues
   $ 59    $ 38    $ 115    $ 72
Selling, general and administrative
   957    215    1,499    395
Research and development
   164    34    302    74








Total stock-based compensation
   $ 1,180    $ 287    $ 1,916    $ 541

The overall increase in stock-based compensation between the 2018 and 2017 periods was due to an increase in stock options granted between July 1, 2017 and June 30, 2018. The increase in selling, general and administrative stock-based compensation for the three and six months ended June 30, 2018, compared to the same periods in 2017, was also due to increased expense for certain Vicor stock options held by a~~non-employee.~~ The fair value of these stock options, and related stock-based compensation, are adjusted monthly based on changes in the assumptions under the Black-Scholes option pricing model, including the price of the Company’s common stock, in accordance with the accounting for stock options granted to~~non-employees.~~

~~Compensation expense by type of award for the three and six months ended June 30 was as follows (in thousands):~~

   Three Months Ended
June 30,    Six Months Ended
June 30,
   2018    2017    2018    2017
Stock options
   $ 1,005    $ 287    $ 1,598    $ 541
ESPP
   175    —      318    —








Total stock-based compensation
   $ 1,180    $ 287    $ 1,916    $ 541

~~-16-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

7.~~Net Income (Loss) per Share~~

~~The following table sets forth the computation of basic and diluted net income (loss) per share for the three and six months ended June 30 (in thousands, except per share amounts):~~

   Three Months Ended
June 30,    Six Months Ended
June 30,
   2018    2017    2018    2017
Numerator:

Net income (loss) attributable to Vicor Corporation
   $ 7,860    $ (459 )    $ 11,803    $ (1,433 )








Denominator:

Denominator for basic net income (loss) per share-weighted average shares (1)
   39,709    39,172    39,594    39,121
Effect of dilutive securities:

Employee stock options (2)
   937    —      812    —








Denominator for diluted net income (loss) per share – adjusted weighted-average shares and assumed conversions
   40,646    39,172    40,406    39,121








Basic net income (loss) per share
   $ 0.20    $ (0.01 )    $ 0.30    $ (0.04 )








Diluted net income (loss) per share
   $ 0.19    $ (0.01 )    $ 0.29    $ (0.04 )

~~(1)~~3.

~~Denominator represents weighted average number of shares of Common Stock and Class B Common Stock outstanding.~~

~~(2)~~

Options to purchase 44,793 and 79,857 shares of Common Stock for the three and six months ended June 30, 2018, respectively, and 1,510,728 shares of Common Stock for the three and six months ended June 30, 2017, respectively, were not included in the calculation of net income (loss) per share as the effect would have been antidilutive.

8.Inventories

Inventories are valued at the lower of cost (determined using thefirst-in,first-out method) or net realizable value. Fixed production overhead is allocated to the inventory cost per unit based on the normal capacity of the production facilities. Abnormal production costs, including fixed cost variances from normal production capacity, if any, are charged to cost of revenues in the period incurred. All shipping and handling costs incurred in connection with the sale of products are included in cost of revenues.

The Company provides reserves for inventories estimated to be excess, obsolete or unmarketable. The Company’s estimation process for assessing net realizable value is based upon its known backlog, projected future demand, historical consumption and expected market conditions. If the Company’s estimated demand and/or market expectation were to change or if product sales were to decline, the Company’s estimation process may cause larger inventory reserves to be recorded, resulting in larger charges to cost of revenues.

~~-17-~~-6-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

~~June 30, 2018~~March 31, 2019

(unaudited)

Inventories were as follows (in thousands):


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Raw materials	$	32,854	$	27,400	$	37,205	$	37,696
Work-in-process		3,513		3,596		6,386		4,740
Finished goods		5,386		5,503		7,998		4,934

Net balance	$	41,753	$	36,499	$	51,589	$	47,370

4.	Long-Term Investments

As of March 31, 2019 and December 31, 2018, the Company held one auction rate security with a par value of $3,000,000, purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the “Failed Auction Security”) since February 2008. The Failed Auction Security held by the Company is Aaa/AA+ rated by major credit rating agencies, is collateralized by student loans, and is guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program. Management is not aware of any reason to believe the issuer of the Failed Auction Security is presently at risk of default. Through March 31, 2019, the Company has continued to receive interest payments on the Failed Auction Security in accordance with the terms of its indenture. Management believes the Company ultimately should be able to liquidate the Failed Auction Security without significant loss primarily due to the overall quality of the issue held and the collateral securing the substantial majority of the underlying obligation. However, current conditions in the auction rate securities market have led management to conclude the recovery period for the Failed Auction Security exceeds 12 months. As a result, the Company continued to classify the Failed Auction Security as long-term as of March 31, 2019.

The following is a summary ofavailable-for-sale securities (in thousands):


March 31, 2019	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Failed Auction Security	$	3,000	$	—	$	454	$	2,546


December 31, 2018	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Failed Auction Security	$	3,000	$	—	$	474	$	2,526

As of March 31, 2019, the Failed Auction Security had been in an unrealized loss position for greater than 12 months.

-7-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

The cost and estimated fair value of the Failed Auction Security on March 31, 2019, by contractual maturity, are shown below (in thousands):


	Cost		Estimated Fair Value
Due in twenty to forty years	$	3,000	$	2,546

Based on the fair value measurements described in Note 5, the fair value of the Failed Auction Security on March 31, 2019, with a par value of $3,000,000, was estimated by the Company to be approximately $2,546,000. The gross unrealized loss of $454,000 on the Failed Auction Security consists of two types of estimated loss: an aggregate credit loss of $40,000 and an aggregate temporary impairment of $414,000. In determining the amount of credit loss, the Company compared the present value of cash flows expected to be collected to the amortized cost basis of the security, considering credit default risk probabilities and changes in credit ratings as significant inputs, among other factors (See Note 5).

The following table represents a rollforward of the activity related to the credit loss recognized in earnings on the Failed Auction Security for the three months ended March 31 (in thousands):


	2019			2018
Balance at the beginning of the period	$	41		$	48
Reductions in the amount related to credit gain for which other-than-temporary impairment was not previously recognized		(1	)		(2	)

Balance at the end of the period	$	40		$	46

5.	Fair Value Measurements

-8-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

Assets and liabilities measured at fair value on a recurring basis included the following as of March 31, 2019 (in thousands):


	Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Fair Value as of March 31, 2019
Cash equivalents:
Money market funds	$	9,484	$	—	$	—		$	9,484
Long-term investments:
Failed Auction Security		—		—		2,546			2,546
Liabilities:
Contingent consideration obligations		—		—		(378	)		(378	)

Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 2018 (in thousands):


	Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Fair Value as of December 31, 2018
Cash equivalents:
Money market funds	$	9,433	$	—	$	—		$	9,433
Long-term investments:
Failed Auction Security		—		—		2,526			2,526
Liabilities:
Contingent consideration obligations		—		—		(408	)		(408	)

As of March 31, 2019, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Security using Level 1 or Level 2 inputs. As such, the Company’s investment in the Failed Auction Security was deemed to require valuation using Level 3 inputs. Management, after consulting with advisors, valued the Failed Auction Security using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set). Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of this security as of March 31, 2019. The major assumptions used in preparing the DCF model were similar to those described in Note 5 - Fair Value Measurements in the Notes to the Consolidated Financial Statements contained in the Company’s 2018Form 10-K.

-9-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

Quantitative information about Level 3 fair value measurements as of March 31, 2019 is as follows (dollars in thousands):


	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Failed Auction Security	$	2,546	Discounted cash flow	Cumulative probability of earning the maximum rate until maturity		0.08	%
				Cumulative probability of principal return prior to maturity		94.01	%
				Cumulative probability of default		5.91	%
				Liquidity risk premium		5.00	%
				Recovery rate in default		40.00	%

The change in the estimated fair value calculated for the investment valued on a recurring basis utilizing Level 3 inputs (i.e., the Failed Auction Security) for the three months ended March 31, 2019 was as follows (in thousands):


Balance at the beginning of the period	$	2,526
Credit gain onavailable-for-sale securities included in Other income (expense), net		1
Gain included in Other comprehensive income		19

Balance at the end of the period	$	2,546

The change in the estimated fair value calculated for the liabilities valued on a recurring basis utilizing Level 3 inputs (i.e., the Contingent consideration obligations) for the three months ended March 31, 2019 was as follows (in thousands):


Balance at the beginning of the period	$	408
Payments		(30	)

Balance at the end of the period	$	378

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2019.

6.	Product Warranties

The Company generally offers atwo-year warranty for all of its products, though it has extended the warranty period to three years for certain military grade products sold after January 1, 2017. The Company is party to a limited number of supply agreements with certain customers contractually committing the Company to warranty and indemnification requirements exceeding those to which the Company has been exposed in the past. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors influencing the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty returns, and the cost per return. The Company periodically assesses the adequacy of warranty reserves and adjusts the amounts as necessary. Warranty obligations are included in “Accrued expenses” in the accompanying Condensed Consolidated Balance Sheets.

~~Product warranty activity for the three and six months ended June 30 was as follows (in thousands):~~

-10-

   Three Months Ended
June 30,    Six Months Ended
June 30,
   2018    2017    2018    2017
Balance at the beginning of the period
   $ 346    $ 185    $ 290    $ 214
Accruals for warranties for products sold in the period
   10    91    133    195
Fulfillment of warranty obligations
   (20 )    (24 )    (77 )    (97 )
Revisions of estimated obligations
   (10 )    (8 )    (20 )    (68 )








Balance at the end of the period
   $ 326    $ 244    $ 326    $ 244

~~10.Severance Charge~~

In May 2018, the Company’s management authorized the closure of its Granite Power Technologies, Inc. (“GPT”) subsidiary, of the Brick Business Unit (“BBU”) segment, by the end of 2018. GPT, located in Manchester, N.H., is one of three Vicor Custom Power (“VCP”) entities. Certain of GPT’s products will continue to be manufactured and sold by the two remaining VCP entities. As a result, the Company recorded a~~pre-tax~~ charge of $350,000 in the second quarter of 2018, for the cost of severance and other employee-related costs involving cash payments based on each employee’s respective length of service. This was recorded as “Severance charge” in the Condensed Consolidated Statement of Operations. The related liability is presented as “Accrued severance charge” in the Condensed Consolidated Balance Sheets.

~~-18-~~

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

~~June 30, 2018~~March 31, 2019

(unaudited)

~~11.~~Product warranty activity was as follows (in thousands):


	Three Months Ended March 31,
	2019			2018
Balance at the beginning of the period	$	268		$	290
Accruals for warranties for products sold in the period		29			123
Fulfillment of warranty obligations		(66	)		(57	)
Revisions of estimated obligations		—			(10	)

Balance at the end of the period	$	231		$	346

Revenues

The following tables present the Company’s net revenues disaggregated by geography based on the location of the customer, by reportable segment (in thousands):


	Three Months Ended March 31, 2019
	BBU		VI Chip		Picor		Total
United States	$	22,292	$	6,237	$	712	$	29,241
Europe		6,009		923		63		6,995
Asia Pacific		17,111		9,158		1,742		28,011
All other		1,213		248		17		1,478

	$	46,625	$	16,566	$	2,534	$	65,725


	Three Months Ended March 31, 2018
	BBU		VI Chip		Picor		Total
United States	$	16,991	$	7,999	$	633	$	25,623
Europe		4,725		573		75		5,373
Asia Pacific		18,211		11,387		3,758		33,356
All other		710		180		27		917

	$	40,637	$	20,139	$	4,493	$	65,269

-11-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

The following tables present the Company’s net revenues disaggregated by the category of revenue, by reportable segment (in thousands):


	Three Months Ended March 31, 2019
	BBU		VI Chip		Picor		Total
Direct customers, contract manufacturers andnon-stocking distributors	$	39,948	$	12,803	$	1,963	$	54,714
Stocking distributors, net of sales allowances		6,117		2,617		549		9,283
Non-recurring engineering		548		1,125		—		1,673
Royalties		12		12		12		36
Other		—		9		10		19

	$	46,625	$	16,566	$	2,534	$	65,725


	Three Months Ended March 31, 2018
	BBU		VI Chip		Picor		Total
Direct customers, contract manufacturers andnon-stocking distributors	$	35,474	$	17,306	$	3,980	$	56,760
Stocking distributors, net of sales allowances		4,963		2,554		389		7,906
Non-recurring engineering		175		245		90		510
Royalties		25		25		25		75
Other		—		9		9		18

	$	40,637	$	20,139	$	4,493	$	65,269

The following table presents the changes in certain contract assets and (liabilities) (in thousands):


	March 31, 2019			December 31, 2018			Decrease
Accounts receivable	$	41,705		$	43,673		$	(1,968	)
Deferred revenue		(3,909	)		(3,820	)		(89	)
Deferred expenses		—			501			(501	)
Customer prepayments		(1,545	)		(1,250	)		(295	)
Sales allowances		(617	)		(548	)		(69	)

The decrease in accounts receivable was primarily due to a decrease in net revenues in the first quarter of 2019 compared to the fourth quarter of 2018.

-12-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

Deferred expenses are included in Other current assets, and customer prepayments are included in Deferred revenue, in the accompanying Condensed Consolidated Balance Sheets, respectively.

8.	Stock-Based Compensation

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock option awards, whether they possess time-based vesting provisions or performance-based vesting provisions, and awards granted under the Vicor Corporation 2017 Employee Stock Purchase Plan (“ESPP”), as of their grant date. Stock-based compensation expense was as follows (in thousands):


	Three Months Ended March 31,
	2019		2018
Cost of revenues	$	69	$	56
Selling, general and administrative		519		542
Research and development		185		138

Total stock-based compensation	$	773	$	736

Compensation expense by type of award was as follows (in thousands):


	Three Months Ended March 31,
	2019		2018
Stock options	$	533	$	593
ESPP		240		143

Total stock-based compensation	$	773	$	736

Leases

All of the Company’s leases are classified as operating leases. The majority of the Company’s leases are for office and manufacturing space, along with several automobiles and certain equipment. Leases with initial terms of less than twelve months are not recorded on the balance sheet. Expense for these leases is recognized on a straight-line basis over the lease term. The Company’s leases have remaining terms of less than one year to just over six years. The majority of the Company’s leases do not have options to renew, although several have renewal terms to extend the lease for one five-year term, and one lease contains two five-year renewal options. None of the renewal options are included in determining the term of the lease, used for calculating the associated lease liabilities. None of the Company’s leases include variable payments, residual value guarantees or restrictive covenants. A number of the Company’s leases for office and manufacturing space include provision for common area maintenance (“CAM”). The Company accounts for CAM separately from lease payments, and therefore costs for CAM are not included in the determination of lease liabilities. The Company is a party to one arrangement as the lessor, for its former Westcor facility located in Sunnyvale, California, with a third party. The lessee under this lease has one option to renew the lease for a term of five years.

-13-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

As of March 31, 2019, the balance of ROU assets was approximately $4,306,000, and the balances of current and long-term lease liabilities were approximately $1,678,000 and $2,747,000, respectively. For the three months ended March 31, 2019, the Company recorded operating lease cost, including short-term lease cost, of approximately $457,000. The ROU assets are included in “Property, plant and equipment, net” in the accompanying Condensed Consolidated Balance Sheets.

The maturities of the Company’s lease liabilities are as follows (in thousands):


2019	$	1,370
2020		1,448
2021		744
2022		439
2023		349
Thereafter		411

Total lease payments	$	4,761
Less: Imputed interest		336

Present value of lease liabilities	$	4,425

As of March 31, 2019, the weighted-average remaining lease term was 3.6 years and the weighted-average discount rate was 3.82% for the Company’s operating leases. The Company developed the discount rates used based on a London Interbank Offered Rate (“LIBOR”) over a term approximating the term of the related lease, plus an additional interest factor, which was generally 1.375%.

For the three months ended March 31, 2019, the Company paid approximately $21,000 for amounts included in the measurement of lease liabilities through operating cash flows, and obtained approximately $406,000 in ROU assets in exchange for new operating lease liabilities.

The maturities of the lease payments to be received by the Company under its leased facility in California are as follows (in thousands):


2019	$	639
2020		874
2021		901
2022		928
2023		955
Thereafter		402

Total lease payments to be received	$	4,699

For the three months ended March 31, 2019, the Company recorded lease income under this lease of approximately $214,000.

-14-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

10.	Income Taxes

The tax provision is based on the estimated annual effective tax rate for the year, which includes estimated federal, state and foreign income taxes on the Company’s projectedpre-tax ~~income (loss).~~income.

The provision for income taxes and the effective income tax rates ~~for the three and six months ended June 30~~ were as follows (dollars in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Provision for income taxes	$	363		$	267		$	497		$	168		$	426		$	134
Effective income tax rate		4.4	%		150.0	%		4.0	%		13.6	%		9.0	%		3.3	%

The effective tax ~~rate was~~rates were lower than the statutory tax ~~rate in~~rates for the first quarter of 2019 and the first quarter of 2018 due primarily to the utilization of net operating loss carryforwards and tax credits. The provisions for income taxes in ~~each 2017 period were primarily due to~~the first quarter of 2019 and the first quarter of 2018 also included estimated foreign income taxes and ~~for~~ estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards. No tax benefit could be recognized for the majority of the Company’s losses during these periods due to a full valuation allowance against all net domestic deferred tax assets. The provision and effective income tax rate were higher in the second quarter of 2017 as the Company had previously recorded a tax benefit in the first quarter of 2017.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) elimination of the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (3) changing rules related to the usage and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017; and (4) implementing a territorial tax system, which generally eliminates the U.S. federal income tax on dividends from foreign subsidiaries, and imposes~~a one-time transition~~ ~~tax on certain earnings of foreign subsidiaries previously untaxed in the United States.~~

Certain impacts of the Tax Act would generally require accounting to be completed in the period of enactment. However, in response to the complexities of the Tax Act, the Securities and Exchange Commission (“SEC”) issued guidance through Staff Accounting Bulletin No. 118 to provide companies with relief. Specifically, when the initial accounting for items under the Tax Act is incomplete, the guidance allows companies to include provisional amounts when reasonable estimates can be made. The SEC has provided up to~~a one-year measurement~~ period for companies to finalize the accounting for the impact of the new legislation and the Company expects to finalize the accounting over the coming quarters. The Company has recognized the provisional tax impacts related to~~the re-measurement of~~ ~~its deferred tax assets and liabilities,and one-time transition~~ tax, for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. There were no changes to the provisional tax impacts referred to above in the first or second quarters of 2018.

~~-19-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

As of ~~June 30, 2018,~~March 31, 2019, the Company ~~continues to maintain~~has a valuation allowance of approximately ~~$33,024,000~~$30,031,000 against all domestic net deferred tax ~~assets.~~assets, for which realization cannot be considered more likely than not at this time. Management assesses the need for the valuation allowance on a quarterly basis. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. ~~Due to improving financial results, there is increasing~~While recent positive ~~evidence to support realization of deferred tax assets. Until actual~~ operating results ~~continue~~caused the Company to be ~~consistently positive, and~~in a cumulative income position as of March 31, 2019, it has been in such a position for only a limited number of quarters. In addition, some uncertainty in economic conditions that could potentially impact the Company ~~believes it is more likely than not it can forecast sufficient future taxable income of the appropriate nature~~has led management to ~~realize those~~conclude a full valuation allowance against all domestic net deferred tax assets ~~it will continue to maintain the full~~is still warranted as of March 31, 2019. The valuation allowance ~~position.~~against these deferred tax assets may require adjustment in the future based on changes in the mix of temporary differences, changes in tax laws, and operating performance. If the positive quarterly earnings continue, the Company may release all or a portion of the valuation in the near-term. If and when the Company determines the valuation allowance should be released (i.e., reduced), the adjustment would result in a tax benefit reported in that period’s ~~consolidated statements~~Consolidated Statements of ~~operations,~~Operations, the effect of which would be an increase in reported net income.

~~In May 2017,~~

-15-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

11.	Net Income per Share

The following table sets forth the Company received notice from the Internal Revenue Service that its federal corporate tax return for tax year 2015 had been selected for examination. The examination was completed in May 2018 resulting in no tax liability to the Company. In January 2018, the Company received notice from the New York State Departmentcomputation of ~~Taxation that its New York State tax returns for tax years 2014 through 2016 were selected for audit. Onsite fieldwork for this audit was completed in May 2018,~~basic and ~~the Company is awaiting the results of the audit.~~diluted net income per share (in thousands, except per share amounts):


	Three Months Ended March 31,
	2019		2018
Numerator:
Net income attributable to Vicor Corporation	$	4,286	$	3,943

Denominator:
Denominator for basic net income per share-weighted average shares (1)		40,229		39,479
Effect of dilutive securities:
Employee stock options (2)		800		688

Denominator for diluted net income per share – adjusted weighted-average shares and assumed conversions		41,029		40,167

Basic net income per share	$	0.11	$	0.10

Diluted net income per share	$	0.10	$	0.10

(1)	Denominator represents weighted average number of shares of Common Stock and Class B Common Stock outstanding.

(2)	Options to purchase 134,535 and 82,241 shares of Common Stock for the three months ended March 31, 2019 and 2018, respectively, were not included in the calculation of net income per share as the effect would have been antidilutive.

12.	Commitments and Contingencies

At ~~June 30, 2018,~~March 31, 2019, the Company had approximately ~~$2,044,000~~$4,393,000 of capital expenditure commitments.

The Company is the defendant in a patent infringement lawsuit originally filed on January 28, 2011 by SynQor, Inc. (“SynQor”) in the U.S. District Court for the Eastern District of Texas (the “Texas Action”). The complaint, as amended in September 2011, alleges that the Company’s products, including but not limited to, unregulated bus converters used in intermediate bus architecture power supply systems, infringe SynQor’s U.S. patent numbers 7,072,190, 7,272,021, 7,564,702, and 8,023,290 (“the ‘190 patent”, “the ‘021 patent”, “the ‘702 patent”, and “the ‘290 patent”, respectively). SynQor’s complaint sought an injunction against further infringement and an award of unspecified compensatory and enhanced damages, interest, costs and attorney fees. The Company has denied that its products infringe any of the SynQor patents, asserted that the SynQor patents are invalid, and asserted that the ‘290 patent is unenforceable due to inequitable conduct by SynQor or its agents during the examination of the ‘290 patent at the United States Patent and Trademark Office (“USPTO”). The Company also asserted counterclaims seeking damages against SynQor for deceptive trade practices and tortious interference with prospective economic advantage arising from SynQor’s attempted enforcement of its patents against the Company. On May 23, 2016, after extensive discovery, the Texas Action was stayed by the court pending completion of certain inter partes reexamination proceedings at the USPTO (including any appeals from such proceedings to the

-16-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

Federal Circuit (as defined below)) concerning the SynQor patents, which are described below. On November 2, 2018, SynQor filed a motion to lift the stay of the Texas Action. On January 3, 2019, the magistrate judge issued an order denying the motion and reaffirming the Court’s original decision that the stay should remain at least until the conclusion of all pending inter partes reexaminations and related appeals. On January 17, 2019, SynQor filed objections to the magistrate judge’s order, and sought reconsideration of that order by the district court judge. The district court judge has not yet ruled on SynQor’s objections.

In 2011, in response to the filing of the Texas Action, the Company initiated inter partes reexamination proceedings at the USPTO challenging the validity of certain claims of the SynQor patents asserted in the Texas Action, including all claims that were asserted against the Company by SynQor. The current status of these proceedings is as follows.

Regarding the ‘190 patent, the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) issued a decision on March 13, 2015, determining that certain claims were invalid, ~~and~~ remanding the matter to the Patent Trial and Appeal Board (“PTAB”) of the USPTO for further proceedings. On May 2, 2016, the PTAB issued a decision ~~determining that~~affirming the examiner’s original rejection of all but one of the remaining claims of the ‘190 patent, ~~were invalid~~ and ~~remanding~~identifying a new basis for rejecting the remaining claim (“claim 34”), which had been added by SynQor during the reexamination. SynQor then requested further examination of claim 34 by the examiner, pursuant to ~~a patent examiner for further examination.~~37 C.F.R. § 41.77(b)(1). On June 22, 2017, the examiner issued a determination under 37 C.F.R. § 41.77(d), finding ~~that the remaining~~ claim ~~of the ‘190 patent~~34 was unpatentable. That decision ~~is expected to be further reviewed~~was affirmed by the PTAB ~~pursuant~~on February 20, 2019. SynQor subsequently appealed that decision to ~~37 C.F.R. § 41.77(f).~~ the Federal Circuit and that appeal is currently pending.

On May 2, 2016, the PTAB also issued decisions finding all challenged claims of SynQor’s ‘021 patent invalid and upholding the validity of all challenged claims of SynQor’s ‘702 and ‘290 patents.

On August 30, 2017, the Federal Circuit issued rulings with regard to ~~PTAB’s reexamination decisions for the ‘021, ‘702 and ‘290 patents.~~those decisions. With respect to the ‘021 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘021 patent were invalid. The Federal Circuit remanded the case to the PTAB for further consideration of the patentability of certain claims that had been added by amendment during the reexamination. On February 20, 2019, the PTAB issued a decision affirming the examiner’s rejections of all challenged claims. With respect to the ‘702 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘702 patent were patentable. With respect to the ‘290 patent, the Federal Circuit vacated the PTAB’s decision upholding the patentability of the ‘290 patent claims, and remanded the case to the PTAB for further consideration.

~~-20-~~

~~VICOR CORPORATION~~

~~Notes~~ On February 20, 2019, the PTAB issued a decision reversing its prior affirmance of the examiner’snon-adoption of rejections with respect to ~~Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

the ‘290 patent, and entering rejections of all of the claims of the ‘290 patent. SynQor may now choose to reopen prosecution of this proceeding, or to appeal the PTAB’s decision to the Federal Circuit.

On October 31, 2017, the Company filed a request with the USPTO for ex parte reexamination of the asserted claims of the ‘702 patent, based on different prior art references than had been at issue in the previous inter ~~parte~~partes reexamination of the ‘702 patent. On December 6, 2017, the USPTO issued a decision ~~granting the Company’s request and~~ initiating ex parte reexamination of the ‘702 ~~patent.~~patent after finding that the Company’s request had raised a substantial new question of patentability of the challenged claims. On March 21, 2018, the ~~USPTO~~examiner issued anon-final office action finding all of the challenged claims of the ‘702 patent to be unpatentable. On May 14, 2018, SynQor filed a petition ~~asking~~requesting the USPTO to vacate its prior decision granting the Company’s request for ex parte reexamination. No action has been taken on the petition to date. On September 12, 2018, the examiner issued a final office action finding all of the challenged claims of the ‘702 patent to be unpatentable. On October 26, 2018, SynQor filed a notice of appeal appealing the examiner’s final rejection to the PTAB. On December 3, 2018, the USPTO denied SynQor’s petition to vacate the decision initiating the ex parte reexamination. On January 25, 2019, SynQor appealed the Examiner’s final rejection to the PTAB. That appeal is pending. The Company continues to monitor the progress of this proceeding.

On August 6, 2018, the Company filed a request with the USPTO for ex parte reexamination of the asserted claims of the ‘190 patent, based on different prior art references than had been at issue in the previous inter partes reexamination of the ‘190 patent. On September 11, 2018, SynQor filed a petition asking the USPTO to reject the Company’s request on the ground that it presented substantially the same prior art or arguments presented to the USPTO in the prior inter partes reexamination of the ‘190 patent. On December 3, 2018, the USPTO denied SynQor’s petition to reject the Company’s ex parte reexamination request. On December 4, 2018, the USPTO instituted ex parte reexamination of the ‘190 patent after finding that the Company’s request had raised a substantial new question affecting the patentability of the challenged claims. On March 15, 2019, the USPTO issued anon-final rejection of all of the asserted claims of the ‘190 patent.

-17-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

On January 23, 2018, the20-year terms of the ‘190 patent, the ‘021 patent and the ‘702 patent expired. The20-year term of the ‘290 patent expired on July 16, 2018. As a consequence of these expirations, the Company cannot be liable under any of the SynQor patents for allegedly infringing activities occurring after the patents’ respective expiration dates. In addition, any amended claims that may issue as a result of any of the still-pending reexamination proceedings will have no effective term and cannot be the basis for any liability by the Company.

The Company continues to believe none of its products, including its unregulated bus converters, infringe any valid claim of the asserted SynQor patents, either alone or when used in an intermediate bus architecture implementation. The Company believes SynQor’s claims lack merit and, therefore, it continues to vigorously defend itself against SynQor’s patent infringement allegations. The Company does not believe a loss is probable for this matter. If a loss were to be incurred, however, the Company cannot estimate the amount of possible loss or range of possible loss at this time.

In addition to the SynQor matter, the Company is involved in certain other litigation and claims incidental to the conduct of its business. While the outcome of lawsuits and claims against the Company cannot be predicted with certainty, management does not expect any current litigation or claims will have a material adverse impact on the Company’s financial position or results of operations.

13.	Segment Information

In 2018, Picor ~~Merger~~

~~On May 25, 2018, the Company’s Board of Directors unanimously approved the merger~~Corporation, a consolidated subsidiary of the Company, was merged with and into the Company, and its operations and personnel were reassigned. Although the legal structure of Picor Corporation (“Picor”), a subsidiary of Vicor, fully consolidated for financial reporting purposes, in which the Company was the majority stockholder. The merger was completed as of May 30, 2018, at which time the separate corporate existence of Picor ceased. To effect the merger, holders of Picor Common Stock and Picor stock options received an equivalent value of Vicor Common Stock and Vicor stock options, respectively, which caused the Picor Corporation Amended and Restated 2001 Stock Option and Incentive Plan, and options outstanding thereunder, to be assumed and restated by Vicor. While Picor’s subsidiary status and corporate formhas ceased to exist, ~~upon~~ the ~~closing of~~Company continues to report its operating segments as the ~~merger, the operations previously conducted by~~Brick Business Unit, VI Chip, and Picor, ~~which are now legally merged into Vicor, continue to be managed~~reflecting its historical organizational segmentation and remain categorized as a segment for financial reporting purposes. There was no net impact on the Company’s consolidated financial statements nor any impact on the Company’s segment reporting for the three and six months ended June 30, 2018 as a result of the merger.management’s operational oversight.

~~14.Segment Information~~

~~The Company has organized its business segments according to its key product lines.~~ The BBU segment designs, develops, manufactures, and markets the Company’s ~~legacy lines of~~modularDC-DC converters and configurable products, and also includes the entities comprising Vicor Custom Power and the BBU operations of Vicor Japan Company, Ltd. (“VJCL”). The VI Chip segment includes VI Chip Corporation, which designs, develops, manufactures, and markets many of the Company’s advanced power component products. The VI Chip segment also includes the VI Chip business conducted ~~in Japan~~ through VJCL. The Picor segment, which consists of the operations of the ~~Company’s~~ former subsidiary, ~~Picor Corporation (see Note 13, above),~~ designs, develops, manufactures, and markets integrated circuits for use in a variety of power management and power system applications. The Picor segment develops integrated circuits for use in the Company’s BBU and VI Chip modules, to be sold as complements to the Company’s BBU and VI Chip products, or for sale to third parties for separate (i.e., stand-alone) applications.

The Company’s Chief Executive Officer (i.e., identified as the ~~chief~~“chief operating decision ~~maker)~~maker”) (“CODM”), pursuant to U.S. GAAP, evaluates performance and allocates resources based on segment revenues and segment operating income (loss). The operating income (loss) for each segment includes selling, general, and administrative and research and development expenses directly attributable to the segment. Certain of the Company’s indirect overhead costs, which include corporate selling, general, and administrative expenses, are allocated among the segments based upon an estimate of costs associated with each segment. Assets allocated to each segment are based upon specific

~~-21-~~

~~VICOR CORPORATION~~

~~Notes to Condensed Consolidated Financial Statements~~

~~June 30, 2018~~

~~(unaudited)~~

identification of such assets, which include accounts receivable, inventories, fixed assets, and certain other assets. The Corporate segment consists of those operations and assets shared by all operating segments. The costs of certain centralized executive and administrative functions are recorded in this segment, as are certain shared assets, most notably cash and cash equivalents, deferred tax assets, long-term investments, the Company’s facilities in Massachusetts, real estate, and other assets. The Company’s accounting policies and method of presentation for segments are consistent with that used throughout the Condensed Consolidated Financial Statements.

-18-

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(unaudited)

The following table provides significant segment financial data as of and for the three months ended ~~June 30~~March 31 (in thousands):


																	BBU		VI Chip		Picor			Corporate			Eliminations (1)			Total
2019:
Net revenues																	$	47,673	$	18,429	$	3,272		$	—		$	(3,649	)	$	65,725
Income (loss) from operations																		6,055		100		(1,310	)		(352	)		—			4,493
Total assets																		287,891		50,975		15,614			84,259			(213,735	)		225,004
Depreciation and amortization																		885		1,011		193			356			—			2,445
Capital Expenditures																		1,175		1,809		338			—			—			3,322
	BBU		VI Chip			Picor		Corporate			Eliminations (1)			Total
2018:
Net revenues	$	48,349	$	20,719		$	9,175	$	—		$	(4,047	)	$	74,196		$	40,637	$	20,881	$	8,221		$	—		$	(4,470	)	$	65,269
Income (loss) from operations		5,227		1,284			2,436		(631	)		—			8,316			1,039		1,081		2,022			(456	)		—			3,686
Total assets		265,952		40,845			12,756		69,889			(198,599	)		190,843			239,619		40,206		12,662			58,095			(176,952	)		173,630
Depreciation and amortization		882		836			196		356			—			2,270			912		811		191			355			—			2,269

2017:
Net revenues	$	39,077	$	15,168		$	6,335	$	—		$	(2,871	)	$	57,709
Income (loss) from operations		2,535		(3,889	)		1,098		(282	)		—			(538	)
Total assets		219,195		27,621			11,287		67,764			(162,252	)		163,615
Depreciation and amortization		1,000		659			190		340			—			2,189

The following table provides segment financial data as of and for the six months ended June 30 (in thousands):

	BBU		VI Chip			Picor		Corporate			Eliminations (1)			Total
2018:
Net revenues	$	88,986	$	41,600		$	17,396	$	—		$	(8,517	)	$	139,465
Income (loss) from operations		6,266		2,365			4,458		(1,087	)		—			12,002
Total assets		265,952		40,845			12,756		69,889			(198,599	)		190,843
Depreciation and amortization		1,794		1,647			387		711			—			4,539

2017:
Net revenues	$	76,612	$	28,090		$	13,193	$	—		$	(5,724	)	$	112,171
Income (loss) from operations		3,955		(7,809	)		2,466		(528	)		—			(1,916	)
Total assets		219,195		27,621			11,287		67,764			(162,252	)		163,615
Depreciation and amortization		1,973		1,288			370		715			—			4,346
Capital Expenditures																		399		1,290		169			—			—			1,858

(1)

The elimination for net revenues is principally related to inter-segment sales by Picor to BBU and VI Chip and for inter-segment sales by VI Chip to BBU. The elimination for total assets is principally related to inter-segment accounts receivable due to BBU for the funding of VI Chip and Picor operations.

Substantially all long-lived assets are located in the United States.

14.	~~-22-~~ ~~VICOR CORPORATION~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~June 30, 2018~~ ~~(unaudited)~~ ~~15.~~Impact of Recently Issued Accounting Standards

In ~~June~~August 2018, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~new~~ guidance which modifies the disclosure requirements on fair value measurements under Topic 820,Fair Value Measurements, ~~Improvements to Nonemployee Share-Based Payment Accounting~~ ~~, which more closely aligns~~including the ~~accounting for share-based payments tonon-employees~~ ~~with the accounting for share-based payments to employees. This~~consideration of costs and benefits.The new guidance is effective for ~~public business~~all entities for annual and interim periods in fiscal years beginning after December 15, ~~2018. Early~~2019, with early adoption permitted. It is ~~permitted, but no earlier than an entity’s adoption date~~required to be applied on a retrospective approach with certain elements being adopted prospectively for only the most recent interim or annual period presented in the initial fiscal year of ~~Topic 606.The~~adoption. The Company ~~is currently evaluating~~has not yet determined the impact this new guidance will have ~~on its consolidated financial statements.~~

~~In May 2017, the FASB issued guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718,~~~~Compensation – Stock Compensation~~. The new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the new standard on January 1, 2018. The adoption of this new guidance did not have a material impact on its consolidated financial statements and related disclosures.

~~In August 2016, the FASB issued guidance to clarify how certain cash receipts and cash payments should be presented in the statement of cash flows. These include debt prepayment, settlement ofzero-coupon~~ debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the new standard on January 1, 2018. The adoption of this new guidance did not have a material impact on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued new guidance which will require measurement and recognition of expected credit losses on certain types of financial instruments. It also modifies the impairment model foravailable-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. It is required to be applied on a modified-retrospective approach with certain elements being adopted prospectively. The Company does not expect the adoption of the new guidance will have a material impact on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued new guidance for lease accounting, which will require lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new guidance establishes a~~right-of-use~~ model (“ROU”) that will require a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and accounting for sales-type and direct financing leases. The majority of the Company’s leases are for certain of its office and manufacturing space. The Company has developed an implementation plan and continues to gather information, including compiling an inventory of all leasing arrangements, to assess the impact of the new standard on its financial statements. The new standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt the new guidance effective January 1, 2019. The new standard must be adopted using a modified retrospective transition which includes certain practical expedients. The Company has not yet determined the impact this new guidance will have on its consolidated financial statements and related disclosures.

Other new pronouncements issued but not effective until after ~~June 30, 2018~~March 31, 2019 are not expected to have a material impact on the Company’s consolidated financial statements.

~~-23-~~-19-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

~~June 30, 2018~~March 31, 2019

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Except~~The Company’s consolidated operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in the Company’s Annual Report on Form10-K for ~~statements~~the year ended December 31, 2018. As a result of ~~historical fact contained herein, statements~~these and other factors, the Company may experience material fluctuations in ~~this report constitute~~future operating results on a quarterly or annual basis, which could materially and adversely affect its business, consolidated financial condition, operating results, and the share price of its listed common stock. This document and other documents filed by the Company with the Securities and Exchange Commission (“SEC”) include forward-looking statements ~~within~~regarding future events and the ~~meaning~~Company’s future results that are subject to the safe harbor afforded under the Private Securities Litigation Reform Act of ~~Section 27A of~~1995 and other safe harbors afforded under the Securities Act of 1933 ~~as amended,~~ and ~~Section 21E of~~ the Securities Exchange Act of 1934, as amended. The words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “assumes,” “may,” “will,” “would,” “should,” “continue,” “prospective,” “project,” and1934. All statements other ~~similar words or expressions identify~~than statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements are based on our current beliefs, expectations, estimates, forecasts, and projections for the future performance of the Company. Forward-looking statements are identified by the use of words denoting uncertain, future events, such as “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “if,” “intend,” “may,” “plan,” “potential,” “project,” “prospective,” “seek,” “should,” “target,” “will,” or “would,” as well as similar words and phrases, including the negatives of these terms, or other variations thereof. Forward-looking statements also include ~~without limitation,~~ statements ~~regarding~~regarding: our ongoing development of power conversion architectures, switching topologies, materials, packaging, and products; the ongoing transition of ~~the Company’s~~our business strategically, organizationally, and ~~organizationally~~operationally from serving a large number of relatively low volume customers across diversified markets and geographies to serving a small number of relatively large volume ~~customers, typically concentrated in computing and communications;~~customers; our intent to enter new market segments; the ~~level~~levels of customer orders overall and, in particular, from large customers and the delivery lead times associated therewith; the financial and operational impact of customer changes to shipping schedules; the derivation of a portion of ~~the Company’s~~our sales in each quarter from orders booked in the same quarter; our intent to expand the ~~Company’s ongoing development~~percentage of ~~power conversion architectures, switching topologies, packaging technologies, and products; the Company’s~~revenue associated with licensing our intellectual property to third parties; our plans to invest in expanded manufacturing capacity and the timing, location, and ~~location~~funding thereof; ~~the Company’s continued success depending in part on its ability to attract and retain qualified personnel; the Company’s~~our belief ~~that~~ cash generated from operations and the total of ~~its~~our cash and cash equivalents will be sufficient to fund operations for the foreseeable future; ~~the Company’s~~our belief that ~~it has~~we have limited exposure to currency risks; ~~the Company’s~~our intentions regarding the declaration and payment of cash dividends; ~~the Company’s~~our intentions regarding protecting ~~its~~our rights under ~~its~~our patents; and ~~the Company’s~~our expectation that no current litigation or claims will have a material adverse impact on ~~its~~our financial position or results of operations. These forward-looking statements are based upon ~~the Company’s~~our current expectations and estimates ~~as to the~~associated with prospective events and circumstances ~~which~~that may or may not be within ~~the Company’s~~our control and as to which there can be no assurance. Actual results could differ materially from those ~~expressed or~~ implied by forward-looking statements as a result of various factors, including the Company’s ability to: grow its revenues, establish and maintain profitability, develop and market new products and technologies cost effectively, and on a timely basis leverage the Company’s new technologies in standard productsbut not limited to promote market acceptance of the Company’s new approach to power system architecture; leverage design wins into increased product sales; continue to meet requirements of key customers and prospects; enter into licensing agreements increasing the Company’s market opportunity and accelerating market penetration; realize significant royalties under such licensing agreements; achieve sustainable bookings rates for the Company’s products across served markets and geographies; improve manufacturing and operating efficiencies; successfully enforce the Company’s intellectual property rights; successfully defend outstanding litigation; hire and retain key personnel; and maintain an effective system of internal controls over financial reporting. These and other factors that may influence actual results arethose described ~~in the risk factors set forth~~ in the Company’s Annual Report on Form10-K for the year ended December 31, ~~2017,~~2018 under Part I, Item 1 — “Business,” under Part I, Item 1A — “Risk Factors,” under Part I, Item 3 — “Legal Proceedings,” and under Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The ~~risk~~discussion of our business contained herein, including the identification and assessment of factors ~~contained in the Company’s Annual Report on Form10-K~~ ~~for the year ended December 31, 2017~~that may influence actual results, may not be exhaustive. Therefore, the information ~~contained therein~~presented should be read together with other ~~reports and~~ documents ~~that the Company files~~we file with the ~~Securities and Exchange Commission~~SEC from time to time, including ~~Forms~~our Annual Reports on Form~~10-Q,8-K~~10-K, our Quarterly Reports on Form10-Q and our Current Reports on Form~~10-K,~~8-K, which may supplement, modify, supersede, or update ~~those risk factors. Except as required by law,~~ the ~~Company does~~factors discussed in this Quarterly Report on Form10-Q. We do not undertake any obligation to update any forward-looking statements as a result of future events or ~~developments.~~developments, except as required by law.

Overview

We design, develop, manufacture, and market modular power components and power systems for converting ~~regulating,~~electrical power for use in electrically-powered devices. Our competitive position is supported by innovations in product design and ~~controlling electric current.~~achievements in product performance, largely enabled by our focus on the research and development of advanced technologies and processes, often implemented in proprietary semiconductor circuitry, materials, and packaging. Many of our products incorporate patented or proprietary implementations of high-frequency switching topologies enabling power system solutions that are more efficient and much smaller than conventional alternatives. Our strategy emphasizes demonstrable product differentiation and a value proposition based on competitively superior solution performance, advantageous design flexibility, and a compelling total cost of ownership. We ~~also license certain rights~~consider our core competencies to ~~our technology in return~~be associated with 48V distribution, which offers numerous inherent cost and performance advantages over lower distribution voltages, although we offer products addressing other voltage standards (e.g., 28V for ~~recurring royalties. The principal customers for our power converters~~defense electronics applications) and ~~systems are large original equipment manufacturers (“OEMs”) and the original design manufacturers (“ODMs”) and contract manufacturers serving them, and smaller, lower volume users. We serve~~ a broad range of ~~market segments and geographies worldwide.~~

We have organized our business segments according to our key product lines. Reflecting our history and direction, we broadly categorize our products as either “legacy” or “advanced,” generally based on design, performance, and form factor considerations, as well as the range of applications for which the products are appropriate.

customer voltage requirements.

~~-24-~~-20-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

~~June 30, 2018~~

March 31, 2019

Based on design, performance, and form factor considerations, as well as the range of evolving applications for which our products are appropriate, we categorize our product portfolios as either “Advanced Products” or “Brick Products.” The Advanced Products category consists of our more recently introduced products, which are largely used to implement our proprietary Factorized Power Architecture^TM (“FPA”), an innovative power distribution architecture enabling flexible, rapid power system design using individual components optimized to perform a specific conversion stage (i.e., function). The Brick Products category largely consists of our broad and well-established families of integrated power converters, incorporating multiple conversion stages, used in conventional distributed power systems architectures.

Given the growth profiles of the markets we serve with Advanced Products and Brick Products, our strategy involves a transition in organizational focus, emphasizing investment in Advanced Products, targeting high growth market segments with alow-mix, high-volume operational model, while maintaining a profitable business in mature market segments we serve with Brick Products with ahigh-mix,low-volume operational model.

For financial reporting purposes, we organize and report our operating segments according to our key product lines. Although our Picor Corporation subsidiary was merged with and into the Company in 2018, we continue to report our operating segments as the Brick Business Unit (“BBU”) operating segment, the VI Chip operating segment, and the Picor operating segment, reflecting our historical organizational segmentation and management’s operational oversight.

The BBU segment designs, develops, manufactures, and markets our ~~legacy~~Brick Product lines ofDC-DC converters and configurable products, as well as complementary components providing AC line rectification, input filtering, power factor correction, and transient protection. The BBU segment, as reported, also includes ~~the BBU business conducted through~~third-party and intra-segment activities of our Vicor Custom Power and Vicor Japan Company, Ltd. (“VJCL”) ~~and our Vicor Custom Power~~ subsidiaries. The BBU has customers concentrated in aerospace and aviation, defense electronics, industrial automation, industrial equipment, medical diagnostics, rail transportation, and test and measurement instrumentation.

The VI Chip segment consists of our subsidiary, VI Chip Corporation, which designs, develops, manufactures, and markets ~~many~~a range of innovative products incorporating our ~~advanced~~latest advances in switching topologies, materials, and packaging, largely used to implement power ~~component products.~~system designs. The VI Chip segment, as reported, also includes ~~the VI Chip business conducted in Japan through~~third-party and intra-segment activities, including those of VJCL. VI Chip generally targets large, high volume customers concentrated in the datacenter and supercomputer segments of the computing market, although we also target applications in aerospace and aviation, autonomous driving, defense electronics, electric and hybrid vehicles, instrumentation and test equipment, networking equipment, and solid state lighting.

The Picor segment consists of the operations of our former subsidiary, Picor Corporation, which was legally merged with and into ~~Vicor~~the Company in May ~~2018 (see Note 13~~2018. While Picor Corporation’s subsidiary status and corporate form ceased to exist upon the ~~Condensed Consolidated Financial Statements).~~closing of the merger, Picor operations remain categorized as an operating segment for financial reporting purposes. The Picor segment designs, develops, and markets integrated circuits for use in a variety of power management and power system applications. The Picor segment is a “fabless manufacturer,” as its products are manufactured, assembled, packaged, and tested by third parties in Asia and the United States. The Picor segment develops integrated circuits for use in ~~our BBU and VI Chip modules,~~products across the Company, to be sold as complements to ~~our BBU and VI Chip~~those products, or for sale to third parties for separate (i.e., stand-alone) applications, and are often integrated with VI Chip segment products to enable ~~a customer solution,~~FPA implementation, particularly in the datacenter and supercomputer segments of the computing market. ~~While~~As such, the Picor ~~Corporation’s subsidiary status~~segment, as reported, includes inter-segment activities.

Revenue from the sale of Advanced Products represents the sum of third-party sales of our Picor and ~~corporate form ceased to exist upon~~VI Chip operating segments. Revenue from the ~~closing~~sale of Brick Products represents the sum of third-party revenue of the ~~merger,~~Brick Business Unit operating segment, inclusive of such sales of our Vicor Custom Power and VJCL subsidiaries. When reporting such revenue on a consolidated basis, intra-segment and inter-segment revenues are eliminated.

The applications in which our Advanced Products and Brick Products are used are typically in the ~~operations previously legally merged into Picor Corporation, which are now conducted by Vicor, continue~~higher-performance, higher-power segments of the market segments we serve. With our Advanced Product lines, we generally serve large Original Equipment Manufacturers (“OEMs”), Original Design Manufacturers (“ODMs”), and their contract manufacturers, with sales currently concentrated within the server, server rack, and datacenter infrastructure segments of the computing market, although we also target customers and applications in aerospace and aviation, defense electronics, industrial automation, instrumentation, test equipment, solid state lighting, telecommunications and networking infrastructure, and vehicles (notably in the autonomous driving applications, electric vehicles, and hybrid electric vehicle niches of the vehicle segment). With our Brick Product lines, we generally serve a fragmented base of large and small customers, concentrated in aerospace and defense electronics, industrial automation, industrial equipment, instrumentation and test equipment, and transportation. With our strategic emphasis on larger, high-volume customers, we expect to ~~be managed~~experience over time a greater concentration of sales among relatively fewer customers.

-21-

VICOR CORPORATION

Management’s Discussion and ~~remain categorized~~Analysis of

Financial Condition and Results of Operation

March 31, 2019

Summary of First Quarter 2019 Financial Performance

Our consolidated financial performance for the first quarter of 2019 declined sequentially from the fourth quarter of 2018, as shipments declined, reflecting slowed bookings during the second half of 2018. Total revenue sequentially declined approximately 11%, as shipments of Advanced Products declined sharply, while shipments of Brick Products were steady quarter to quarter. Our gross margin as a ~~segment~~percentage of revenue rose sequentially, to 47.3% from the prior quarter’s 45.9%, largely attributable to improved average selling prices and an improved mix of products shipped, partially offset by higher tariff charges and lower absorption of manufacturing overhead expenses. While operating expenses were steady sequentially, our consolidated operating margin as a percentage of revenue declined to 6.8% from 9.5%, largely because of the sequential decline in revenue. Net income attributable to Vicor Corporation (i.e., after net income or loss attributable to a noncontrolling interest) for ~~financial reporting purposes.~~the first quarter of 2019 declined sequentially to $4,286,000, representing earnings per share for the first quarter of 2019 of $0.10, in contrast to the corresponding figures of $6,910,000 and $0.17 for the fourth quarter of 2018.

First quarter 2019 bookings increased 10% sequentially over the fourth quarter of 2018, primarily driven by improved orders for Brick Products. Bookings for Advanced Products remained at a level consistent with the fourth quarter of 2018, largely reflecting the limited visibility of a primary customer for near-term demand for that customer’s supercomputing and high performance computing systems, which utilize ourPower-on-Package solutions for Artificial Intelligence (“AI”) applications.

Our ~~improved~~quarterly consolidated operating results ~~for the second quarter~~can be difficult to forecast and have been subject to significant fluctuations. We plan our production and inventory levels based on management’s estimates of ~~2018 were driven by an increase~~customer demand, based on customer forecasts and other sources. Customer forecasts, particularly those of OEM, ODM, and contract manufacturing customers to which we supply Advanced Products in ~~net revenues,~~high volumes, are subject to scheduling changes on short notice, contributing to operating inefficiencies and excess costs. In addition, external factors such as global macroeconomic conditions and supply-chain conditions have caused our operating results to vary meaningfully. Our quarterly gross margin as a ~~consequence~~percentage of ~~sequential quarterly increases in bookings and order backlog, as well as improved gross margins resulting from higher~~revenue may vary, depending on production volumes, ~~favorable~~average selling prices, average unit costs, and the mix of products sold that quarter. Our quarterly operating margin as a percentage of revenue also may vary with changes in revenue and product ~~mix,~~level profitability, but our operating costs are largely associated with compensation and improved pricing. The sequential increase in quarterly revenue for the period was primarily a result of double-digit percentage increases in the value of shipments of certain legacy and advanced product lines, as well as the start of production shipments of our~~“Power-on-Package~~^TM~~” solution.~~

~~Current order booking activity reflects customer interest in our expanding portfolio of highly-differentiated advanced products. Market uptake of our 48 volt~~related employee costs, which are not subject to~~point-of-load~~ ~~solutions for datacenters and supercomputers accelerated during the second quarter of 2018, with increased order volumes for ourPRM-VTM~~ ~~andPower-on-Package~~ ~~solutions. We also are receiving increased interest and orders for our ChiP,SM-ChiP,~~ ~~andCM-ChiP~~ ~~modules across a range of applications.Year-to-date~~ bookings for our legacy brick converters, configurable products, and associated components have recovered and are above historical trend, which we attribute primarily to the extended recovery of economic conditions in the geographies and markets we serve, notably in defense electronics, high-value capital goods, and rail. sudden or significant changes.

We believe the following considerations may influence our financial performance over the remainder of ~~2018:~~2019:

Operational Considerations

We operate a highly automated electronics manufacturing facility in Andover, Massachusetts, and our profitability is closely aligned with production unit volumes. We have invested significantly instate-of-the-art systems, equipment, and robotics, which allow us to generate relatively higher profitability when operating at or near factory capacity, even with a high mix of products produced. However, periods of low volume production and/or brief, low volume production runs contribute to lower profitability, largely due to lower absorption of relatively high manufacturing overhead costs associated with our manufacturing model. While direct labor and associated variable costs generally correlate with volume, manufacturing overhead costs are inflexible and, therefore, problematic during periods of low volume or brief production runs.

We ~~have invested~~continue to invest in the production capacity to meet our internal volume projections, and believe these projections are ~~reasonable.~~reasonable and our investment will be adequate. However, if sustained, uniform, high volume production levels are not achieved, notably in Advanced Products, our product-level profitability likely will not reach the levels necessary to cover our fixed spending, consisting of manufacturing overhead costs and operating costs.

Current capital investments are focused on the expansion of manufacturing capacity for the production of Advanced Products at our Andover facility. Based on our long-term forecast of production levels, we anticipate substantial additional capacity will be required to meet requirements beyond 2020. We believe the most appropriate manner of meeting our long-term capacity requirements will be to initially expand the production area of our Andover facility by approximately 85,000 square feet, through the addition of a two story wing. We have entered the design and permitting phase for this project and plan to break ground on this addition to our existing plant in 2019 and take occupancy in 2020. We also are proceeding with the

~~-25-~~-22-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

~~June 30, 2018~~

March 31, 2019

evaluation of alternative projects for the addition of another, larger manufacturing facility, should we anticipate the need based on our forecasts for capacity beyond 2021. Construction activity can be difficult to schedule, and construction sites can present management and operational challenges. As such, given the proximity of the addition to our existing operations, this construction activity has the potential to disrupt our current operations, which could cause production to be delayed and costs to increase.

Our ability to achieve sustained, high volume production levels is tied to our ability to forecast manufacturing requirements for, and the availability of, a range of inputs, notably raw material inventories. Because we utilize a number of components and other materials of proprietary design, our ability to sustain targeted production schedules and meet customer delivery requirements has been vulnerable to delays or shortages of such inventories, which often cause prices of these components and materials to rise. With the implementation in 2018 of Section 301 Tariffs on certain Chinese goods imported into the United States, we are now exposed to potentially higher costs on certain electronic components and devices we import from China for use in the manufacture of our products. For the first quarter of 2019, costs associated with duties and tariffs exceeded $1,000,000. We continue to assess the impact of these costs and, if the Chinese trade dispute is not resolved in the near-term in a manner that eliminates or substantially reduces such costs, we may add a “tariff surcharge” to the selling price of our products.

To mitigate supply chain risks, we focus on identifying and reducing potential vulnerabilities to stock-outs, vendor shortages, and similar disruptions. We maintain safety-stock programs for certain critical components and materials, and these programs recently have contributed to increased levels of raw material ~~inventory.~~inventory primarily for Advanced Products. We also have established second-source supply relationships, in order to reduce exposure to material shortages. ~~However,~~Although the global electronics supply chain ~~continues~~has generally stabilized, we continue to experience lengthened lead times for certain product categories, and our product-level profitability and overall performance could be negatively influenced by an unplanned shortage of a particular component or material. We ~~do not expect lead-times to shorten in 2018 and~~ anticipate availability of certain commodity components will remain ~~uncertain.~~uncertain through 2019.

~~We expect our operating expenses, notably in engineering and sales, to remain relatively high, as percentages of revenue, for the foreseeable future.~~

As revenue has increased, ~~these percentages~~our operating expenses have declined as a percentage of revenue, although such expenses have not declined meaningfully on an absolute basis. We have expanded and focused our engineering and sales organizations to pursue the promising opportunities afforded by our innovative ~~advanced products,~~Advanced Products, and we believe our current level of absolute spending is necessary to achieve our strategic goals. However, many of these opportunities are in early phases of development, and near-term revenue growth may not be sufficient to further reduce the percentages of revenue represented by our operating expenses ~~meaningfully~~ or to levels comparable to our high volume competitors.

Market and Macroeconomic Considerations

Based on current customer activity, an expanding customer list, and an expanding backlog, we believe the ~~48 volt~~48V topoint-of-load opportunity has entered an accelerated, second phase of development, with a broadening of interest, ~~notably associated with ourPower-on-~~ ~~Package solution,~~ as well as the entry of new ~~vendors.~~vendors offering 48V solutions. OurPower-on-Package solution powering graphics processing units (“GPUs”) and application-specific integrated circuits (“ASICs”) used in AI applications has received strong customer interest, and we have secured significant design wins for the solution. We also believe customer interest in the application of 48V distribution to server racks and datacenter infrastructure is accelerating. As such, we likely will face a more complex competitive landscape, with additional ~~challenges.~~challenges and competitors. We continue to believe our new products will be adopted in volume by multiple leading customers, as the number of OEMs, ODMs, hyperscalers, and cloud services providers with which we are engaged in development activities expanded in ~~the second quarter.~~2018. However, we cannot control the actions by, or the timing of, our customers, their contract manufacturers, or the significant vendors also participating in the market. Many of these vendors possess resources far greater than we do and have operational and financial flexibility we do not. Notably, our outlook for 2019 bookings and shipments ofPower-on-Package solutions has been influenced by the sudden, fourth quarter 2018 shift in the confidence of our primary customer for those solutions, given reduced visibility of near-term demand for that customer’s supercomputing and high performance computing systems utilizing our solutions. Despite recent and anticipated design wins, as well as the strong momentum of AI computing through 2018, recent customer uncertainty may cause orders from new and existing customers to be delayed, potentially influencing our financial results and capacity expansion plans.

-23-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2019

We anticipate aggregate demand for the mature markets we serve with our ~~legacy products~~Brick Products will grow ~~at most, only~~over the long-term at the rate of the overall industrial economy (i.e., in the United States, for example, at the rate of growth approximating that of the industrial segments of gross domestic product) ~~for the foreseeable future.~~. Given our long-standing customer relationships and the status of our ~~legacy products~~Brick Products in ~~long-lived~~long-standing customer applications, we anticipate maintaining our share in many of these mature markets. While we are pursuing opportunities to replace ~~our legacy products~~many Brick Products used in existing customers’ applications with ~~advanced products~~Advanced Products, when appropriate, and, similarly, to replace competitors’ products in existing applications, we believe such opportunities may not cumulatively contribute to expanding, in ~~2018,~~2019, our share of the mature markets we serve with our ~~legacy products.~~Brick Products.

Financial ~~Highlights:~~Highlights

~~Net revenues increased 28.6% to $74,196,000~~

Revenues for the ~~second~~first quarter ended March 31, 2019 totaled $65,725,000, a 0.7% increase from $65,269,000 for the corresponding period a year ago, and a 10.8% sequential decrease from $73,720,000 in the fourth quarter of 2018. The sequential decline in quarterly revenue is associated primarily with lower bookings for certain Advanced Products during the fourth quarter of 2018 ~~from $57,709,000~~and customer postponement of backlog originally scheduled for shipment during the ~~second~~first quarter of 2017, primarily due to an overall 47.3% increase in bookings in the second quarter of 2018, compared to the second quarter of 2017, with significant increases across all business units. We have recorded sequential increases in total bookings over the past ten quarters.2019.

Net revenues for the six months ended June 30, 2018 increased by 24.3% to $139,465,000 from $112,171,000 for the six months ended June 30, 2017, primarily due to an overall 44.4% increase in bookings for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, with significant increases across all business units.

~~-26-~~

~~VICOR CORPORATION~~

~~Management’s Discussion and Analysis of~~

~~Financial Condition and Results of Operation~~

~~June 30, 2018~~

Export sales, as a percentage of total revenues, represented approximately ~~64.2% in~~55.5% for the ~~second~~first quarter of 2019, 60.7% for the first quarter of 2018, and ~~65.4% in~~60.5% for the ~~second~~fourth quarter of ~~2017. Export~~2018. The sequential decline in export sales as a percentage of total ~~revenues, for~~revenue is attributable to the ~~six months ended June 30, 2018 and 2017 were approximately 62.6% and 64.4%, respectively.~~decline in shipments during the first quarter of 2019 of certain Advanced Products to Asian contract manufacturers.

Gross margin increased to ~~$35,883,000~~$31,086,000 for the ~~second~~first quarter of ~~2018 from $25,930,000~~2019, compared to $30,211,000 for the ~~second~~corresponding period a year ago, and decreased sequentially from $33,873,000 for the fourth quarter of ~~2017, and gross~~2018. Gross margin, as a percentage of ~~net revenues,~~revenue, increased to ~~48.4%~~47.3% for the ~~second~~first quarter of ~~2018 from 44.9%~~2019, compared to 46.3% for the ~~second~~corresponding period a year ago, and increased from 45.9% for the fourth quarter of ~~2017, both due~~2018.The sequential improvement in gross margin percentage is attributable largely to ~~the increase in net revenues.~~improved average selling prices and an improved mix of products shipped, partially offset by higher tariff charges and lower absorption of manufacturing overhead expenses.

Gross margin increased to $66,094,000 for the six months ended June 30, 2018 from $49,582,000 for the six months ended June 30, 2017, and gross margin, as a percentage of revenues, increased to 47.4% for the six months ended June 30, 2018, compared to 44.2% for the six months ended June 30, 2017, both due to the increase in net revenues.

Backlog, representing the total of orders for products received for which shipment is scheduled within the next 12 months, was approximately ~~$103,100,000~~$103,832,000 at the end of the ~~second~~first quarter of ~~2018,~~2019, as compared to $89,975,000 at the end of the first quarter of 2018 and $102,963,000 at the end of the fourth quarter of 2018. The sequential increase in backlog ~~has been due~~is attributable primarily to ~~the~~a sequential ~~increases~~17% increase in bookings ~~across all business units, noted above.~~for Brick Products.

Operating expenses for the ~~second~~first quarter of 2019 increased $68,000, or 0.3%, to $26,593,000 from $26,525,000 for the first quarter of 2018, ~~increased $1,099,000, or 4.2%, to $27,567,000~~but declined less than one percent from ~~$26,468,000~~$26,797,000 for the ~~second~~fourth quarter of 2017, due to an increase in selling, general, and administrative expenses of $1,278,000, partially offset by a decrease in research and development expense of $529,000. We recorded a severance charge of $350,000 during the second quarter of 2018 in connection with the planned closure of one of our Vicor Custom Power subsidiaries, Granite Power Technologies, Inc. (“GPT”), as part of our ongoing initiative to streamline operations and improve our cost structure.2018.

Operating expenses for the six months ended June 30, 2018 increased $2,594,000, or 5.0%, to $54,092,000 from $51,498,000 for the six months ended June 30, 2017, due to an increase in selling, general, and administrative expenses of $2,654,000 and the $350,000 severance charge noted above, partially offset by a decrease in research and development expense of $410,000.

~~We reported net~~Net income for the ~~second~~first quarter of ~~2018 of $7,860,000,~~2019 was $4,286,000, or ~~$0.19~~$0.10 per diluted share, compared to ~~a net loss of $(459,000),~~$3,943,000 or ~~$(0.01)~~$0.10 per diluted share, for the ~~second~~first quarter of ~~2017.~~

~~We reported~~2018 and net income ~~for the six months ended June 30, 2018,~~ of ~~$11,803,000,~~$6,910,000, or ~~$0.29~~$0.17 per diluted share, ~~compared to a net loss of $(1,433,000), or $(0.04) per share,~~ for the ~~six months ended June 30, 2017.~~fourth quarter of 2018.

~~For the six months ended June 30, 2018, depreciation~~

Depreciation and amortization totaled ~~$4,539,000,~~$2,445,000, and capital additions totaled ~~$3,558,000,~~$3,322,000 for the first quarter of 2019, compared to ~~$4,346,000~~$2,269,000 and ~~$5,631,000,~~$1,858,000, respectively, for the ~~six months ended June 30, 2017.~~first quarter of 2018, and $2,384,000 and $11,317,000, respectively, for the fourth quarter of 2018. The sequential decline in quarterly capital additions is associated primarily with the placement in service of a substantial amount of manufacturing equipment during the fourth quarter of 2018.

-24-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

March 31, 2019

Inventories, ~~increased by approximately $5,254,000, or 14.4%, to $41,753,000~~net of reserves, totaled $51,589,000 at ~~June 30, 2018,~~the end of the first quarter of 2019, compared to ~~$36,499,000~~$38,959,000 at ~~December 31, 2017. This~~the end of the first quarter of 2018 and $47,370,000 at the end of the fourth quarter of 2018. The sequential increase in net inventories was primarily associated with ~~increases~~a $4,808,000 increase in ~~VI Chip~~work-in-progress and ~~BBU inventories~~finished goods balances associated with rescheduled shipments of ~~$4,127,000~~certain Advanced Products and ~~$1,625,000, respectively, to meet increased bookings for the two segments,~~a $1,154,000 decline in reserves, partially offset by a ~~decrease~~decline in ~~Picor inventories~~raw materials of ~~$498,000.~~$1,742,000.

Critical Accounting Policies and Estimates

Please refer to the Company’s Annual Report on Form10-K for the year ended December 31, ~~2017~~2018 for a summary of the Company’s critical accounting policies and estimates.

See Note 2 to the Condensed Consolidated Financial Statements pertaining to the adoption of the new accounting standard for ~~revenue recognition.~~lease accounting.

Three months ended March 31, 2019, compared to three months ended March 31, 2018

Consolidated net revenues for the first quarter of 2019 were $65,725,000, an increase of $456,000, or 0.7%, as compared to $65,269,000 for the first quarter of 2018, and a decrease of $7,995,000, or 10.8%, on a sequential basis from $73,720,000 for the fourth quarter of 2018.

Net revenues, by reporting segment, for the first quarter of 2019 and the first quarter of 2018 were as follows (dollars in thousands):


					Increase (decrease)
	2019		2018		$			%
BBU	$	46,625	$	40,637	$	5,988			14.7	%
VI Chip		16,566		20,139		(3,573	)		(17.7	)%
Picor		2,534		4,493		(1,959	)		(43.6	)%

Total	$	65,725	$	65,269	$	456			0.7	%

The increase in BBU segment revenues was primarily attributable to increases in BBU module and configurable product revenues of approximately $4,749,000 and Vicor Custom Power revenues of approximately $1,503,000. Revenues for the VI Chip and Picor segments declined, primarily due to certain orders originally scheduled to ship in the first quarter of 2019 which were rescheduled into the second and third quarters of 2019.

Gross margin for the first quarter of 2019 increased $875,000, or 2.9%, to $31,086,000, from $30,211,000 for the first quarter of 2018. Gross margin as a percentage of net revenues increased to 47.3% for the first quarter of 2019 compared to 46.3% for the first quarter of 2018. Both increases were primarily due to broadly improved average selling prices and an improved mix of products shipped, partially offset by higher tariff charges and lower absorption of manufacturing overhead expenses in the first quarter of 2019.

Selling, general, and administrative expenses were $15,373,000 for the first quarter of 2019, a decrease of $26,000, or 0.2%, from $15,399,000 for the first quarter of 2018. Selling, general, and administrative expenses as a percentage of net revenues decreased to 23.4% for the first quarter of 2019 from 23.6% for the first quarter of 2018.

~~-27-~~-25-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

~~June 30, 2018~~

~~Three months ended June 30, 2018, compared to three months ended June 30, 2017~~

Consolidated net revenues for the second quarter of 2018 were $74,196,000, an increase of $16,487,000, or 28.6%, as compared to $57,709,000 for the second quarter of 2017, and an increase of $8,927,000, or 13.7%, on a sequential basis from $65,269,000 for the first quarter of 2018.

~~Net revenues, by segment, for the second quarter of 2018 and the second quarter of 2017 were as follows (dollars in thousands):~~

         Increase
   2018    2017    $    %
BBU
   $ 48,349    $ 39,077    $ 9,272    23.7 %
VI Chip
   19,890    14,527    5,363    36.9 %
Picor
   5,957    4,105    1,852    45.1 %







Total
   $ 74,196    $ 57,709    $ 16,487    28.6 %

The increase in consolidated net revenues for the second quarter of 2018 from the second quarter of 2017 was primarily due to an overall 47.3% increase in bookings in the second quarter of 2018, compared to the second quarter of 2017, with significant increases across all business units. The increase in BBU segment revenues was primarily attributable to an increase in BBU module and configurable product revenues of approximately $8,471,000. Increases in revenues recorded by the VI Chip and Picor segments for the second quarter of 2018 were associated largely with fulfillment of increased orders for our 48 volt to~~point-of-load~~ ~~solutions.~~

Gross margin for the second quarter of 2018 increased $9,953,000, or 38.4%, to $35,883,000, from $25,930,000 for the second quarter of 2017. Gross margin as a percentage of net revenue increased to 48.4% for the second quarter of 2018 compared to 44.9% for the second quarter of 2017. Both increases were primarily due to the increase in net revenues and an improved mix of products shipped.

~~-28-~~

~~VICOR CORPORATION~~

~~Management’s Discussion and Analysis of~~

~~Financial Condition and Results of Operation~~

~~June 30, 2018~~

Selling, general, and administrative expenses were $15,814,000 for the second quarter of 2018, an increase of $1,278,000, or 8.8%, from $14,536,000 for the second quarter of 2017. Selling, general, and administrative expenses as a percentage of net revenues decreased to 21.3% for the second quarter of 2018 from 25.2% for the second quarter of 2017, primarily due to the increase in net revenues.

~~The components of the $1,278,000 increase in selling, general and administrative expenses for the second quarter of 2018 from the second quarter of 2017 were as follows (dollars in thousands):~~

   Increase (decrease)
Compensation
   $ 1,221    13.8 %(1)
Legal fees
   163    38.8 %(2)
Audit, tax, and accounting fees
   144    43.2 %(3)
Facilities expenses
   (89 )    (21.9 )%
Travel expenses
   (113 )    (13.1 )%(4)
Other, net
   (48 )    (1.3 )%



   $ 1,278    8.8 %

~~(1)~~

Increase primarily attributable to annual compensation adjustments in May 2018, increased stock-based compensation expense and increases in headcount. The increase in stock-based compensation expense was due to an increase in stock options granted between July 1, 2017 and June 30, 2018, and to increased expense for certain Vicor stock options held by a~~non-employee.~~

~~(2)~~

~~Increase attributable to an increase in corporate legal matters, including the Picor merger.~~

~~(3)~~

~~Increase primarily attributable to the timing of the 2018 audit process.~~

~~(4)~~

~~Decrease primarily attributable to decreased travel by our sales and marketing personnel.~~

~~-29-~~

~~VICOR CORPORATION~~

~~Management’s Discussion and Analysis of~~

~~Financial Condition and Results of Operation~~

~~June 30, 2018~~

March 31, 2019

Research and development expenses were ~~$11,403,000~~$11,220,000 for the ~~second~~first quarter of ~~2018, a decrease~~2019, an increase of ~~$529,000,~~$94,000, or ~~4.4%~~0.8%, compared to ~~$11,932,000~~$11,126,000 for the ~~second~~first quarter of ~~2017.~~2018. As a percentage of net revenues, research and development expenses ~~decreased~~increased to ~~15.4%~~17.1% for the ~~second~~first quarter of ~~2018~~2019 from ~~20.7%~~17.0% for the ~~second~~first quarter of ~~2017, primarily due to the increase in net revenues.~~

~~The components of the $529,000 decrease in research and development expenses were as follows (dollars in thousands):~~

   Increase (decrease)
Project andpre-production materials
   $ (1,122 )    (43.4 )%(1)
Compensation
   238    3.0 %(2)
Supplies expense
   262    137.0 %(3)
Deferred costs
   264    49.9 %(4)
Other, net
   (171 )    (9.2 )%



   $ (529 )    (4.4 )%

~~(1)~~

Decrease primarily attributable to decreased spending for new product development by the VI Chip segment. Spending on the development of Power-on-Package technology, for example, was at a high point in the second quarter of 2017.

~~(2)~~

~~Increase primarily attributable to annual compensation adjustments in May 2018, increased stock-based compensation expense and increases in headcount.~~

~~(3)~~

~~Increase primarily attributable to an increase in spending by the VI Chip segment.~~

~~(4)~~

~~Increase primarily attributable to a decrease in deferred costs capitalized for certainnon-recurring~~ ~~engineering projects for which the related revenues have been deferred.~~

~~-30-~~

~~VICOR CORPORATION~~

~~Management’s Discussion and Analysis of~~

~~Financial Condition and Results of Operation~~

~~June 30, 2018~~

~~In May 2018, the Company’s management authorized the closure of GPT by the end of~~ 2018. GPT is one of three Vicor Custom Power (“VCP”) entities, located in Manchester, N.H. Certain of GPT’s products will continue to be manufactured and sold by the two remaining VCP entities. As a result, we recorded a~~pre-tax~~ ~~charge of $350,000 in the second quarter of 2018, for the cost of severance and other employee-related costs involving cash payments based on each employee’s respective length of service.~~

The significant components of ‘‘Other income (expense), net’’ for the three months ended ~~June 30,~~March 31, and the changes between the periods were as follows (in thousands):


	2018			2017		Increase (decrease)			2019			2018		Increase (decrease)
Rental income	$	198		$	198	$	—		$	198		$	198	$	—
Interest income										83			55		28
Foreign currency (losses) gains, net		(312	)		110		(422	)		(58	)		161		(219	)
Interest income		53			23		30
Gain on disposals of equipment		3			21		(18	)		9			14		(5	)
Credit gains onavailable-for-sale securities		2			3		(1	)		1			2		(1	)
Other, net		12			5		7			6			—		6

	$	(44	)	$	360	$	(404	)	$	239		$	430	$	(191	)

Our exposure to market risk fluctuations in foreign currency exchange rates relates to the operations of VJCL, for which the functional currency is the Japanese Yen, and all other subsidiaries in Europe and Asia, for which the functional currency is the U.S. Dollar. These other subsidiaries in Europe and Asia experienced unfavorable foreign currency exchange rate fluctuations in ~~2018~~2019 compared to ~~2017.~~2018. Interest income increased due to an increase in interest rates.

Income ~~(loss)~~ before income taxes was ~~$8,272,000~~$4,732,000 for the ~~second~~first quarter of ~~2018,~~2019, as compared to ~~$(178,000)~~$4,116,000 for the ~~second~~first quarter of ~~2017.~~2018.

The provision for income taxes and the effective income tax rates for the ~~second~~first quarter of ~~2018~~2019 and the ~~second~~first quarter of ~~2017~~2018 were as follows (dollars in thousands):


	2018			2017			2019			2018
Provision for income taxes	$	363		$	267		$	426		$	134
Effective income tax rate		4.4	%		150.0	%		9.0	%		3.3	%

See Note 10 to the Condensed Consolidated Financial Statements for ~~the majority~~disclosure regarding our current assessment of ~~our losses during that period due to a full~~the valuation allowance against all domestic net ~~domestic~~ deferred tax ~~assets. The provision~~assets, and ~~effective income tax rate were relatively high~~the possible release (i.e., reduction) of the allowance in the ~~second quarter of 2017 as we had previously recorded a tax benefit in the first quarter of 2017.~~future.

Net income per diluted share attributable to Vicor Corporation was ~~$0.19~~$0.10 for both the ~~second~~first quarter of ~~2018 as compared to net loss per share of $(0.01) for~~2019 and the ~~second~~first quarter of ~~2017.~~2018.

~~-31-~~-26-

VICOR CORPORATION

Management’s Discussion and Analysis of

Financial Condition and Results of Operation

~~June 30, 2018~~

March 31, 2019

~~Six months ended June 30, 2018, compared to six months ended June 30, 2017~~

~~Consolidated net revenues for the sixmonths ended June 30, 2018 were $139,465,000, an increase of $27,294,000, or 24.3%, from $112,171,000 for the six months ended June 30, 2017.~~

~~Net revenues, by segment, for the six months ended June 30, 2018 and the six months ended June 30, 2017 were as follows (dollars in thousands):~~

         Increase
   2018    2017    $    %
BBU
   $ 88,986    $ 76,612    $ 12,374    16.2 %
VI Chip
   40,029    26,951    13,078    48.5 %
Picor
   10,450    8,608    1,842    21.4 %







Total
   $ 139,465    $ 112,171    $ 27,294    24.3 %

The overall increase in consolidated net revenues for the six months ended June 30, 2018 from the six months ended June 30, 2017 was primarily due to an overall 44.4% increase in bookings for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, with significant increases across all business units. The increase in BBU segment revenues was primarily attributable to an increase in BBU module and configurable product revenues of approximately $10,553,000, VJCL revenues of approximately $1,363,000 and Vicor Custom Power revenues of $631,000. Increases in revenues recorded by the VI Chip and Picor segments for the six months ended June 30, 2018 were associated largely with fulfillment of increased orders for our 48 volt to~~point-of-load~~ ~~solutions.~~

Gross margin for the six months ended June 30, 2018 increased $16,512,000, or 33.3%, to $66,094,000 from $49,582,000 for the six months ended June 30, 2017, primarily due to the increase in net revenues. Gross margin as a percentage of net revenues increased to 47.4% for the six month period ended June 30, 2018 compared to 44.2% for the six month period ended June 30, 2017. Both increases were primarily due to the increase in net revenues and an improved mix of products shipped.

~~-32-~~

~~VICOR CORPORATION~~

~~Management’s Discussion and Analysis of~~

~~Financial Condition and Results of Operation~~

~~June 30, 2018~~

Selling, general and administrative expenses were $31,213,000 for the six months ended June 30, 2018, an increase of $2,654,000, or 9.3%, compared to $28,559,000 for the six months ended June 30, 2017. Selling, general and administrative expenses as a percentage of net revenues decreased to 22.4% for the six month period ended June 30, 2018 from 25.5% for the six month period ended June 30, 2017, primarily due to the increase in net revenues.

The components of the $2,654,000 increase in selling, general and administrative expenses for the six months ended June 30, 2018 from the six months ended June 30, 2017 were as follows (dollars in thousands):

   Increase (decrease)
Compensation
   $ 2,042    11.5 %(1)
Audit, tax, and accounting fees
   486    59.9 %(2)
Legal fees
   207    27.2 %(3)
Computer expenses
   89    18.3 %
Travel expenses
   (78 )    (5.3 )%
Facilities expenses
   (85 )    (10.4 )%
Commissions expense
   (161 )    (9.1 )%(4)
Other, net
   154    3.3 %



   $ 2,654    9.3 %

~~(1)~~

~~(2)~~

~~Increase primarily attributable to the timing of the 2018 audit process and higher total audit fees for the 2017 audit, a portion of which was expensed in 2018, compared to the 2016 audit.~~

~~(3)~~

~~Increase attributable to an increase in corporate legal matters, including the Picor merger.~~

~~(4)~~

~~Decrease primarily attributable to the decrease in net revenues subject to commissions.~~

~~-33-~~

~~VICOR CORPORATION~~

~~Management’s Discussion and Analysis of~~

~~Financial Condition and Results of Operation~~

~~June 30, 2018~~

Research and development expenses were $22,529,000 for the six months ended June 30, 2018, a decrease of $410,000, or 1.8%, from $22,939,000 for the six months ended June 30, 2017. As a percentage of net revenues, research and development expenses decreased to 16.2% for the six month period ended June 30, 2018 from 20.5% for the six month period ended June 30, 2017, primarily due to the increase in net revenues.

~~The components of the $410,000 decrease in research and development expenses for the six months ended June 30, 2018 from the six months ended June 30, 2017 were as follows (dollars in thousands):~~

   Increase (decrease)
Project andpre-production materials
   $ (1,139 )    (27.7 )%(1)
Outside services
   100    36.8 %
Deferred costs
   246    30.7 %(2)
Supplies expense
   256    61.0 %(3)
Compensation
   349    2.2 %(4)
Other, net
   (222 )    (6.7 )%



   $ (410 )    (1.8 )%

~~(1)~~

~~(2)~~

~~Increase primarily attributable to a decrease in deferred costs capitalized for certainnon-recurring~~ ~~engineering projects for which the related revenues have been deferred.~~

~~(3)~~

~~Increase primarily attributable to an increase in spending by the VI Chip segment.~~

~~(4)~~

~~Increase primarily attributable to annual compensation adjustments in May 2018, increased stock-based compensation expense and increases in headcount.~~

The significant components of ‘‘Other income (expense), net’’ for the six months ended June 30, 2018 and the six months ended June 30, 2017 and the changes from period to period were as follows (in thousands):

   2018    2017    Increase
(decrease)
Rental income
   $ 396    $ 396    $ —
Foreign currency (losses) gains, net
   (152 )    204    (356 )
Interest income
   108    47    61
Gain on disposals of equipment
   16    23    (7 )
Credit gains onavailable-for-sale securities
   4    6    (2 )
Other, net
   14    9    5






   $ 386    $ 685    $ (299 )

~~-34-~~

~~VICOR CORPORATION~~

~~Management’s Discussion and Analysis of~~

~~Financial Condition and Results of Operation~~

~~June 30, 2018~~

~~Income (loss) before income taxes was $12,388,000 for the six months ended June 30, 2018, as compared to $(1,231,000) for the six months ended June 30, 2017.~~

~~The provision for income taxes and the effective income tax rates for the six months ended June 30, 2018 and the six months ended June 30, 2017 were as follows (dollars in thousands):~~

   2018 2017
Provision for income taxes
   $ 497 $ 168
Effective income tax rate
   4.0 % 13.6 %

The effective tax rate was lower than the statutory tax rate in 2018 due to the utilization of net operating carryforwards and tax credits. The provision for income taxes in 2017 was primarily due to estimated foreign income taxes and for estimated state taxes in jurisdictions in which we do not have net operating loss carryforwards. No tax benefit could be recognized for the majority of our losses during the periods due to a full valuation allowance against all net domestic deferred tax assets.

~~Net income per diluted share attributable to Vicor Corporation was $0.29 for the six months ended June 30, 2018, compared to net loss per share of $(0.04) for the six months ended June 30, 2017.~~

Liquidity and Capital Resources

As of ~~June 30, 2018,~~March 31, 2019, we had ~~$53,920,000~~$66,614,000 in cash and cash equivalents. The ratio of total current assets to total current liabilities was ~~4.7:~~5.3:1 as of ~~June 30, 2018~~March 31, 2019 and ~~4.2:~~4.6:1 as of December 31, ~~2017.~~2018. Working capital, defined as total current assets less total current liabilities, increased ~~$23,196,000~~$3,993,000 to ~~$113,992,000~~$133,055,000 as of ~~June 30, 2018~~March 31, 2019 from ~~$90,796,000~~$129,062,000 as of December 31, ~~2017.~~2018.

The changes in working capital from December 31, ~~2017~~2018 to ~~June 30, 2018~~March 31, 2019 were as follows (in thousands):

   Increase
(decrease)
Cash and cash equivalents
   $ 9,690
Accounts receivable
   10,569
Inventories, net
   5,254
Other current assets
   486
Accounts payable
   (2,154 )
Accrued compensation and benefits
   (1,158 )
Accrued expenses
   454
Sales allowances
   (550 )
Accrued severance charge
   (350 )
Income taxes payable
   (226 )
Deferred revenue
   1,181


   $ 23,196

~~-35-~~

~~VICOR CORPORATION~~

~~Management’s Discussion and Analysis of~~

~~Financial Condition and Results of Operation~~

~~June 30, 2018~~


	Increase (decrease)
Cash and cash equivalents	$	(3,943	)
Accounts receivable		(1,968	)
Inventories, net		4,219
Other current assets		420
Accounts payable		4,972
Accrued compensation and benefits		1,247
Accrued expenses		465
Operating lease liabilities		(1,678	)
Sales allowances		(69	)
Accrued severance charge		185
Income taxes payable		528
Deferred revenue		(385	)

	$	3,993

The primary ~~sources~~uses of cash for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 were ~~from~~for purchase of equipment of $3,322,000 and operating activities of ~~$8,528,000 and~~$2,120,000. The primary source of cash for the three months ended March 31, 2019 from proceeds was from the issuance of Common Stock upon the exercise of options under our stock option plans and ~~the sale~~our 2017 Employee Stock Purchase Plan, of ~~shares of our Common Stock under our ESPP, of $4,966,000. The primary use of cash for the six months ended June 30, 2018 was for purchase of equipment of $3,558,000.~~$1,570,000.

In November 2000, our Board of Directors authorized the repurchase of up to $30,000,000 of our Common Stock (the “November 2000 Plan”). The November 2000 Plan authorizes us to make such repurchases from time to time in the open market or through privately negotiated transactions. The timing and amounts of Common Stock repurchases are at the discretion of management based on its view of economic and financial market conditions. We did not repurchase shares of Common Stock under the November 2000 Plan during the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. As of ~~June 30, 2018,~~March 31, 2019, we had approximately $8,541,000 remaining under the November 2000 Plan.

We had approximately $4,393,000 of capital expenditure commitments, principally for manufacturing equipment, as of March 31, 2019, which we intend to fund with existing cash. Our primary liquidity needs are for making continuing investments in manufacturing ~~equipment.~~equipment and, if we proceed with the planned construction of 85,000 square feet of additional manufacturing space adjoining our existing Andover manufacturing facility, for funding architectural and construction costs. We believe cash generated from operations and the total of our cash and cash equivalents will be sufficient to fund planned ~~operations and~~operational needs, capital equipment purchases, and the planned construction, for the foreseeable future. ~~We had approximately $2,044,000 of capital expenditure commitments, principally for manufacturing equipment, as of June 30, 2018.~~

~~-36-~~-27-

Vicor Corporation

~~June 30, 2018~~March 31, 2019

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of market risks, including changes in interest rates affecting the return on our cash and cash equivalents and fluctuations in foreign currency exchange rates. As our cash and cash equivalents consist principally of cash accounts and money market securities, which are short-term in nature, we believe our exposure to market risk on interest rate fluctuations for these investments is not significant. As of ~~June 30, 2018,~~March 31, 2019, our long-term investment portfolio, recorded on our Condensed Consolidated Balance Sheet as “Long-term investments, net”, consisted of a single auction rate security with a par value of $3,000,000, purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the “Failed Auction Security”) since February 2008. While the Failed Auction Security is Aaa/AA+ rated by major credit rating agencies, collateralized by student loans and guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program, continued failure to sell at its periodic auction dates (i.e., reset dates) could negatively impact the carrying value of the investment, in turn leading to impairment charges in future periods. Periodic changes in the fair value of the Failed Auction Security attributable to credit loss (i.e., risk of the issuer’s default) are recorded through earnings as a component of “Other income (expense), net”, with the remainder of any periodic change in fair value not related to credit loss (i.e., temporary“mark-to-market” carrying value adjustments) recorded in “Accumulated other comprehensive (loss) income”, a component of Stockholders’ Equity. Should we conclude a decline in the fair value of the Failed Auction Security is other than temporary, such losses would be recorded through earnings as a component of “Other income (expense), net”. We do not believe there was an “other-than-temporary” decline in value in this security as of ~~June 30, 2018.~~March 31, 2019.

Our exposure to market risk for fluctuations in foreign currency exchange rates relates to the operations of VJCL, for which the functional currency is the Japanese Yen, and changes in the relative value of the Yen to the U.S. Dollar. The functional currency of all other subsidiaries in Europe and other subsidiaries in Asia is the U.S. Dollar. While we believe risk to fluctuations in foreign currency exchange rates for these subsidiaries is generally not significant, they can be subject to substantial currency changes, and therefore foreign exchange exposures.

Item 4 — Controls and Procedures

(a) Disclosure regarding controls and procedures.

As required byRule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management, with the participation of our Chief Executive Officer (“CEO”) (who is our principal executive officer) and Chief Financial Officer (“CFO”) (who is our principal financial officer), conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the last fiscal quarter (i.e., ~~June 30, 2018)~~March 31, 2019). The term “disclosure controls and procedures,” as defined inRules 13a-15(e) and15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information required to be disclosed by a company in the reports it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of ~~June 30, 2018,~~March 31, 2019, our CEO and CFO concluded, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Accordingly, management, including the CEO and CFO, recognizes our disclosure controls or our internal control over financial reporting may not prevent or detect all errors and all fraud. The design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the

-28-

Vicor Corporation

March 31, 2019

likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any control’s effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

(b) Changes in internal control over financial reporting.

~~-37-~~

~~Vicor Corporation~~

~~June 30, 2018~~

~~(b)~~

~~Changes in internal control over financial reporting.~~

There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended ~~June 30, 2018,~~March 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~-38-~~-29-

Vicor Corporation

Part II – Other Information

~~June 30, 2018~~March 31, 2019

Item 1 — Legal Proceedings

See Note 12.Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 – “Financial Statements.”

Item 1A — Risk Factors

There have been no material changes in the risk factors described in Part I, Item 1A – “Risk Factors” of the Company’s Annual Report on Form10-K for the year ended December 31, ~~2017.~~2018.

Item 6 — Exhibits


Exhibit Number		Description

~~10.1~~		~~Picor Corporation Amended and Restated 2001 Stock Option and Incentive Plan, dated May 30, 2018 (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form8-K~~ ~~filed on June 5, 2018).~~

31.1		Certification of Chief Executive Officer pursuant to Rule13a-14(a) of the Exchange Act.

31.2		Certification of Chief Financial Officer pursuant to Rule13a-14(a) of the Exchange Act.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following material from the Company’s Quarterly Report on Form10-Q, for the quarter ended ~~June 30, 2018,~~March 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive ~~Income (Loss);~~Income; (iv) the Condensed Consolidated Statements of Cash Flows; (v) the Condensed Consolidated Statements of Equity; and ~~(v)~~(vi) the Notes to Condensed Consolidated Financial Statements.

~~-39-~~-30-

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	VICOR CORPORATION

Date: ~~July 31, 2018~~April 30, 2019	By:	/s/ Patrizio Vinciarelli
		Patrizio Vinciarelli
		Chairman of the Board, President and
		Chief Executive Officer
		(Principal Executive Officer)

Date: ~~July 31, 2018~~April 30, 2019	By:	/s/ James A. Simms
		James A. Simms
		Vice President, Chief Financial Officer
		(Principal Financial Officer)

~~-40-~~-31-


	Page
Part I — Financial Information:
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018		1
Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~		2
Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~ for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~		3
Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~		4
Condensed Consolidated Statements of Equity for the three months ended March 31, 2019 and 2018		5
Notes to Condensed Consolidated Financial Statements		56
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		2420
Item 3 - Quantitative and Qualitative Disclosures About Market Risk		3728
Item 4 - Controls and Procedures		3728
Part II — Other Information:
Item 1 - Legal Proceedings		3930
Item 1A - Risk Factors		3930
Item 6 - Exhibits		3930
Signature(s)		4031
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO


	As reported		Adjustments			Balances without adoption of Topic 606
Accounts receivable, net	$	45,056	$	(39	)	$	45,017
Inventories, net		41,753		(97	)		41,656
Total assets		190,843		(136	)		190,707

Income taxes payable		526		(18	)		508
Deferred revenue		4,610		4,445			9,055
Sales allowances		550		(466	)		84
Total liabilities		31,905		3,961			35,866

Retained earnings		109,078		(4,097	)		104,981
Total equity		158,938		(4,097	)		154,841
Total liabilities and equity		190,843		(136	)		190,707


	Three Months Ended
	As reported		Adjustments			Balances without adoption of Topic 606
Net revenues	$	74,196	$	(597	)	$	73,599
Cost of revenues		38,313		(372	)		37,941

Gross margin		35,883		(225	)		35,658

Income before income taxes		8,272		(225	)		8,047
Provision for income taxes		363		(11	)		352
Consolidated net income		7,909		(214	)		7,695
Net income attributable to Vicor Corporation		7,860		(214	)		7,646

	Six Months Ended
	As reported		Adjustments			Balances without adoption of Topic 606
Net revenues	$	139,465	$	(1,401	)	$	138,064
Cost of revenues		73,371		(956	)		72,415

Gross margin		66,094		(445	)		65,649

Income before income taxes		12,388		(445	)		11,943
Provision for income taxes		497		(18	)		479
Consolidated net income		11,891		(427	)		11,464
Net income attributable to Vicor Corporation		11,803		(427	)		11,376


			Estimated
	Cost		Fair Value
Due in twenty to forty years	$	3,000	$	2,581


	Fair Value		Valuation Technique	Unobservable Input	Weighted Average
Failed Auction Security	$	2,581	Discounted cash flow	Cumulative probability of earning the maximum rate until maturity		0.06	%
				Cumulative probability of principal return prior to maturity		94.36	%
				Cumulative probability of default		5.58	%
				Liquidity risk premium		5.00	%
				Recovery rate in default		40.00	%


					Increase
	2018		2017		$		%
BBU	$	48,349	$	39,077	$	9,272		23.7	%
VI Chip		19,890		14,527		5,363		36.9	%
Picor		5,957		4,105		1,852		45.1	%

Total	$	74,196	$	57,709	$	16,487		28.6	%


	Increase (decrease)
Compensation	$	1,221		13.8	%(1)
Legal fees		163		38.8	%(2)
Audit, tax, and accounting fees		144		43.2	%(3)
Facilities expenses		(89	)	(21.9	)%
Travel expenses		(113	)	(13.1	)%(4)
Other, net		(48	)	(1.3	)%

	$	1,278		8.8	%


	Increase (decrease)
Project andpre-production materials	$	(1,122	)	(43.4	)%(1)
Compensation		238		3.0	%(2)
Supplies expense		262		137.0	%(3)
Deferred costs		264		49.9	%(4)
Other, net		(171	)	(9.2	)%

	$	(529	)	(4.4	)%


	Increase (decrease)
Compensation	$	2,042		11.5	%(1)
Audit, tax, and accounting fees		486		59.9	%(2)
Legal fees		207		27.2	%(3)
Computer expenses		89		18.3	%
Travel expenses		(78	)	(5.3	)%
Facilities expenses		(85	)	(10.4	)%
Commissions expense		(161	)	(9.1	)%(4)
Other, net		154		3.3	%

	$	2,654		9.3	%


	Increase (decrease)
Project andpre-production materials	$	(1,139	)	(27.7	)%(1)
Outside services		100		36.8	%
Deferred costs		246		30.7	%(2)
Supplies expense		256		61.0	%(3)
Compensation		349		2.2	%(4)
Other, net		(222	)	(6.7	)%

	$	(410	)	(1.8	)%